The outlook for Indian commercial real estate outlook presents a mixed bag across segments with strong consumption trends driving the growth for retail mall operators and warehousing sectors. However, the office segment, despite being resilient, is facing a slowdown in leasing from technology-based sectors due to global headwinds, said ratings agency ICRA.
It expects the rental income for mall operators to increase by 9-10% on-year in the current financial year and a mildly lower 8-9% in 2024-25, driven by healthy occupancy levels, growth in trading values and rental escalations.
Across the top six cities in India, new supply of 9-10 million sq ft and around 6 million sq ft is expected in 2023-24 and 2024-25, respectively.
Though the net absorption was healthy in the first three quarters of this financial year, the vacancy levels rose by 100 bps to 20% as of December 2023 due to higher new supply, which has become operational recently and is yet to ramp up fully. ICRA expects the occupancy levels to sustain at 81-82% as of March 2024 and improve to 82-83% by March 2025.
“Retail mall operators witnessed a strong rebound in FY2023 in terms of footfalls and trading values and the trends continued in 9M FY2024. Backed by expected growth in footfalls, increase in spend for footfall driven by premiumisation and strong urban consumption, ICRA projects the trading values to improve by 14-15% in FY2024 and record 10-12% expansion in FY2025 on a high base,” said Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA.
According to her, segments like jewellery, electronics, apparels, beauty care products of premium brands, and entertainment witnessed above-average consumption growth in the recent quarters, which is expected to continue in the near to medium term with strong consumer demand. However, the increase in digital penetration and continued threat from e-commerce players particularly in the retail fashion segment that is extending to some of the premium brands is a major challenge for the retail mall developers.
The credit profile of the mall operators is expected to remain stable. The leverage ratio for the malls, measured by debt/NOI, is likely to improve to 5.0-5.2 times as of March 2024 from 5.5 times as of March 2023, with expected improvement in the NOI which is likely to sustain at similar levels in the next financial year. Consequently, the debt service coverage ratio (DSCR), which was around 1.25 times in FY2023, is projected to improve to 1.35x-1.40x in 2023-24 and 2024-25.
Warehousing – Growing needs of a massive consumption market driving the expansion of the sector
Conferring the ‘Infrastructure’ status to the logistics and warehousing sector, the rapid expansion of new-age sectors like e-commerce and allied services, the growing needs of the massive consumption market, and the government’s focus on making India as a manufacturing hub has resulted in a steep uptick in warehousing demand. Moreover, there is a growing preference by the occupiers for Grade A, ESG-compliant warehouses with modern storage solutions.
Over the last five years, the supply of grade A warehouses has grown at a healthy CAGR of 24% to 166 million sq ft in 2022-23 and is expected to be around 195 million sq ft in this financial year, with an estimated increase of 15-16% on-year in the next financial year.
“ICRA anticipates the credit profile of the warehousing players to remain Stable. The occupancy levels are likely to remain high at 95% in FY2025, driven by e-commerce, 3PL and manufacturing-led demand. The rental income and the NOI are expected to grow by ~30-32% in FY2025, supported by the commencement of rentals from newly added capacities and scheduled rental escalations,” Reddy said.
The leverage measured by debt/NOI is expected to remain comfortable in the range of 5.3-5.5 times in 2024-25, improving from around 6.3 times in 2023-24 following healthy growth in the NOI. The coverage indicators measured by the DSCR are forecast to remain around 1.55 times in 2024-25, improving from 1.4 times in the current financial year.
Office segment – Global macroeconomic headwinds loom over office leasing.
ICRA estimates the net absorption of office leasing across the top six cities in India to decline by 19-20% to 47-48 million sq ft this financial year and witness a mild growth of 4-5% in 2024-25. With the influx of a huge supply of around 60-62 million sq ft each in 2023-24 and 2024-25, the vacancy levels are expected to inch up to 16.0%-16.2% this year and next financial year from 15.5% in 2022-23 as supply is expected to outpace absorption.
“For the office segment, despite an increase in physical occupancy, several tenants chose to adopt a cautious approach given the global macroeconomic headwinds, resulting in slowdown in leasing activity in the technology-based sectors. This was also visible from a decline in net absorption by 17% YoY in 9M FY2024 for the top six cities. However, the demand from global capability centres (GCCs), non-IT MNCs and domestic corporates remained healthy, supporting the leasing levels,” she said.
In December, the government announced a partial and floor-wise denotification of IT-SEZs, which is expected to revive their attractiveness in the medium term. 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.”
The credit profile of ICRA’s sample set of office players is expected to remain stable, driven by healthy growth in the NOI, backed by improvement in occupancy and higher rentals.
Consequently, the leverage metrics, as measured by debt/NOI, are expected to improve to 4.5 times as of March 2025 from the estimated 5.3 times as of March 2024. Even after factoring in the increase in interest rates, the DSCR is expected to improve and remain healthy at 1.35 times in 2024-25, over 1.25 times in 2023-24.
