Net leasing of commercial office space in India will stagnate this fiscal at 32-34 million square feet (msf), with global uncertainties brewing caution among key tenant categories, said a report by CRISIL Ratings. It further added that the inherent strengths of the Indian market and increasing shift to return to office should help demand pick up over the medium term, keeping credit profiles of office asset owners stable.
In India, commercial office space is mostly dominated by technology companies, with information technology (IT) and IT-enabled services (ITeS) companies occupying 42-45 per cent 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, it said.
“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.
“Notwithstanding the near-term hiccups, net leasing is expected to grow 10-12 per cent next fiscal to 36-38 msf. Growth is expected to remain at a similar level over the medium term as well supported by both GCCs and domestic enterprises. 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,” said Saina Kathawala, Associate Director, CRISIL Ratings.
Given the sound medium-term outlook and adequate leverage, credit profiles of office operators will remain stable, said the report that analysed the office space owners with over Rs 70,000 crore debt and total leasable area of ~185 msf. The ratio of debt to earnings before interest, tax, depreciation and amortisation (EBITDA) and debt service coverage ratio will remain comfortable under 5.0 times and at 1.6-1.7 times, respectively, this fiscal and the next.
That said, CRISIL 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.