Net leasing of commercial office space in India is likely to stagnate the current financial year at 32-34 million sq ft with global uncertainties brewing caution among key tenant categories, said the ratings agency CRISIL Ratings.
The inherent strengths of the Indian market and increasing shift to return to office should, however, help demand pick up over the medium term, keeping credit profiles of office asset owners stable, the ratings agency said.
India’s commercial office space is dominated by technology companies, with information technology (IT) and IT-enabled services (ITeS) companies occupying 42-45% of the operational stock.
Global capability centres (GCCs) of multinational corporations have also emerged as a key category of tenants in the past few years, occupying around a third of the total stock. These two determinants will keep demand modest in the near term amid global economic headwinds.
“Net leasing of office space will be impacted by two factors this fiscal. One, headcount addition in the Indian IT/ITeS sector has already come to a halt amid tapering revenue growth and pressure on profitability. Plus, the sector may look to control costs, including rent. Two, GCCs may defer large-scale leasing plans in India amid weak macroeconomic outlook in key regions such as the US and Europe,” said Gautam Shahi, Director, CRISIL Ratings.
On the other hand, demand from the domestic enterprises in the banking, financial services, and insurance (BFSI), consulting, engineering, pharmaceuticals, and e-commerce segments, which occupy the remainder of India’s office area, will remain buoyant, resulting in net leasing of 32-34 million sq ft this fiscal, same as that in fiscal 2023.
Employers pushing for increased physical occupancy in offices may prove to be another tailwind for office leasing. Most companies including those in technology, which otherwise were favouring work-from-home are now pushing for return to office on most days of the week. Physical occupancy, which averaged 40% last fiscal, is expected at 65-70% this fiscal.
“Notwithstanding the near-term hiccups, net leasing is expected to grow 10-12% next fiscal to 36-38 million sq ft. Growth is expected to remain at a similar level over the medium term as well supported by both GCCs and domestic enterprises,” said Saina Kathawala, Associate Director, CRISIL Ratings.
According to her, GCCs are expected to drive office demand, given cost advantages of the Indian market vis-à-vis other developing markets as well as the availability of a skilled talent pool. Additionally, demand from domestic enterprises will remain healthy backed by strong financial health and good growth prospects.
Given the sound medium-term outlook and adequate leverage, credit profiles of office operators will remain stable. A CRISIL Ratings analysis of office space owners with over Rs 70,000 crore debt and total leasable area of nearly 185 million sq ft indicates as much.
The ratio of debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) and debt service coverage ratio will remain comfortably under 5.0 times and at 1.6-1.7 times, respectively, this fiscal and the next.
That said, the duration and intensity of the global economic slowdown and its impact on hiring as well as overall business plans of companies can impact future leasing and will bear watching.