Global recessionary fears are not stopping the take up of office spaces in India, as the leasing is expected to grow 10-15% next financial year as well. Also, despite growth momentum tempering, credit profiles of commercial realtors would remain healthy, according to CRISIL.
Net leasing of commercial office space in India will grow to 28-30 million square feet this financial year and increase to 31-33 million sq.ft. in FY24 riding on improvement in demand as employers increasingly favour employees working from office, albeit with some flexibility.
Also Read: Crisil sees banks’ GNPAs touching decadal low of 4% by FY24
However, demand is still below the pre-pandemic high of around 42 million sq.ft. seen in fiscal ending March 2020, but within sniffing distance of the fiscal 2018- 2019 mark of about 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, said the ratings firm.
A CRISIL Ratings analysis of players with over Rs 63,000 crore debt and total leasable area of close to 170 million sq.ft. indicates that credit profiles of commercial realtors will remain healthy in the milieu, backed by adequate leverage. 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. 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.
Also Read: 43% of MSMEs likely to remain below pre-Covid EBITDA margins in FY23: Crisil
“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 three factors. The IT/ITeS sector, which accounts for nearly 45% of India’s office leasing space, will continue to witness low single digit employee addition in the current and next fiscal. Also, 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 around 30% of India’s office area — will add office space,” said Anand Kulkarni, director, CRISIL Ratings.
To be sure, the IT/ITeS sector had hired aggressively last fiscal as well, taking its employee base up about 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, analysts at CRISIL expect that this will increase the probability of more offshoring to India as a low-cost centre.
“The occupancy levels will stagnate at 84-85% this fiscal, against our earlier expectation of an improvement by 100- 150 basis points, due to deferment of leasing plans. Notwithstanding, the occupancy level is expected to inch up by about 100 bps to 85-86% next fiscal as leasing activity picks up,” it said.