ICRA predicts a 10% YoY decline in net absorption for office leasing in FY2024, while vacancy levels are expected to rise by 60 basis points to 15.5%.

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By Staff Reporter

ICRA estimates the net absorption of office leasing across the top six cities[1] in India to decline by 10% YoY in FY2024. This along with an influx of huge supply in FY2024, would result in a marginal rise in vacancy levels by 60 bps to 15.5% by the end of FY2024. The office developers are expected to witness a revenue growth of 11-13% in FY2024 for ICRA’s sample[2] set of non-REIT companies, supported by scheduled rent escalation and improvement in occupancy levels of reputed office players. Further, the rental rates are estimated to rise by 3-5% YoY in FY2024, driven by contracted escalations/lease renewals at higher rates. ICRA’s outlook on the commercial office sector is Stable.

The net absorption of office leasing stood healthy at ~57 million square feet (msf) in FY2023 similar to FY2020 levels (22 msf in FY2021 and 33 msf in FY2022) as corporates continued to focus on returning to office, and additional space was required for existing tenants. Physical occupancy increased to around 65% as of June 2023 from 25% in June 2022.

Giving more insights, Ms. Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA, said: Given the global macroeconomic headwinds, many tenants chose to adopt a cautious approach while going ahead with the expansion plans. This can also be seen from a decline in the net absorption by 40% YoY to 9.6 msf in Q1 FY2024 from 13.4 msf in Q1 FY2023. The large space-takers are expected to continue to adopt a wait-and-watch approach in the near term, which is expected to result in a 10% YoY moderation in net absorption levels in FY2024. However, India continues to remain a preferred destination for global capability centers (GCCs). Favourable demographics, a highly skilled and cost-effective talent pool, availability of high-quality office spaces at competitive rentals, would continue to drive demand for the Indian office portfolio in the medium to long term.”

As on June 30, 2023, the total grade A office stock in the top six markets stood at around 880 msf, with Bengaluru having the highest supply of 27% followed by Delhi NCR and the Mumbai Metropolitan Region. During FY2023, Hyderabad pipped Bangalore in overall supply addition, which is expected to continue in FY2024. The supply is estimated at around 63-64 msf in FY2024, with Hyderabad accounting for 34%, followed by Bengaluru (23%) and Pune (13%).

“The credit profile of the office players is expected to remain stable, driven by healthy growth in net operating income (NOI) backed by higher rentals and consequently, the leverage metrics of the players as measured by debt/NOI is expected to improve to 5.3x-5.8x in FY2024, from 6.3-6.8x in FY2023. Even after factoring in the increase in interest rates, the coverage metrics are expected to improve and remain healthy at 1.25x-1.30x in FY2024, compared to 1.05-1.10x in FY2023, on the back of improved NOI,” Ms. Reddy added.

[1] Top six cities include Mumbai, Bangalore Delhi-NCR, Hyderabad, Chennai, and Pune

[2] ICRA’s sample includes 22 commercial office operators totalling ~165 million square feet

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