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office leasing: Amid recession buzz, office leasing likely to grow 10-15% in FY24 too

Net leasing of commercial office space in India is expected to grow 10-15% in the ongoing financial year to 28-30 million sq ft and by 28-30% in the next financial year 2023-24 to 31-33 million sq ft in the backdrop of improvement in demand as employers increasingly favour employees’ return to work, albeit with some flexibility, said CRISIL Ratings.

Demand will be below the pre-pandemic high of nearly 42 million sq ft registered in the year 2020, but will be near the fiscal 2019 mark of 34 million sq ft.

While global recessionary headwinds and slower hiring in technology may lead to a possible deferment of leasing plans, thereby subduing demand growth in the next two quarters, the strength of the Indian economy and competitiveness of commercial real estate will keep the demand drivers intact.

Credit profiles of commercial realtors will remain healthy in the milieu, backed by adequate leverage, , said the ratings agency.

A CRISIL Ratings analysis of players with over Rs 63,000 crore debt and total leasable area of nearly 170 million sq ft indicates the same.

“After gathering pace in the first half of this fiscal, office leasing will fall back temporarily in the second half. Next fiscal, leasing growth will be supported by key factors. One, the IT/ITeS sector, which accounts for 45% of India’s office leasing space, will continue to witness low single digit employee addition in the current and next fiscal,” said Anand Kulkarni, Director, CRISIL Ratings.

According to him, physical occupancy at offices across sectors, will increase from 30-50% at present. The Indian economy will remain resilient and sectors such as BFSI, consulting, engineering, pharma, and e-commerce–accounting for 30% of India’s office area–will add office space.
The IT/ITeS sector had hired aggressively last fiscal as well, taking its employee base up 15%. Return-to-office for the expanded employee base will continue to require more office space.

Additionally, while the anticipated slowdown in global economies may result in temporary deferment of leasing decisions, on the brighter side, it increases the probability of more offshoring to India, which is a low-cost centre.

The occupancy levels will stagnate at 84-85% in the current financial year, against earlier expectation of an improvement by 100-150 bps, due to deferment of leasing plans, CRISIL Ratings said.

Notwithstanding, the occupancy level is expected to inch up by 100 bps to 85-86% next fiscal as leasing activity picks up.

“Despite lower leasing demand and stagnant occupancy, players rated by us are expected to remain resilient. The ratio of debt to earnings before interest, tax, depreciation and amortisation (Ebitda) will remain comfortable at 4.6 times this fiscal and 4.4 times next fiscal, compared with 5.1 times last fiscal,” said Saina Kathawala, Associate Director, CRISIL Ratings.

According to her, while the cost of debt has been inching up, the debt service coverage indicator is also expected to remain comfortable at 1.7-1.8 times this fiscal and the next financial year.

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