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Commercial realty absorption to rise 18% in FY22 after contracting in FY21: Report

·3-min read

Mumbai, Feb 25 (PTI) Office space absorption will grow by up to 18 per cent in fiscal 2022 on a low base of fiscal 2021 courtesy a 45 per cent fall, return to offices and improvements in the macroeconomic conditions, a report said on Thursday.

The net leasing, which is overall absorption subtracted by the space vacated, will grow to 25-30 million square feet, the report by Crisil Ratings said, adding that despite the increase it will still be below the pre-pandemic levels as work from home will continue.

Credit profiles of commercial real estate owners are expected to resist the hiccups due to pandemic, the agency, which rates 37 companies owning 86 assets with a debt of around Rs 30,000 crore and a total leasable area of around 100 million sq ft, said, pointing to healthy cushions in debt servicing which can withstand the marginal build-up of vacancy or pressure on rental rates.

Between fiscal 2018 and fiscal 2020, net leasing of commercial office space clocked a healthy compound annual growth rate (CAGR) of 15-20 per cent, with Hyderabad, NCR, and Mumbai Metropolitan Region accounting for the bulk of the pie, it said, adding that the demand was driven by IT and finance sectors' employee growths.

This trend has reversed in the financial year 2021 due to the demand destruction and heightened uncertainty brought by the pandemic, with corporate revenues taking a hit and most companies adopting a work-from-home policy.

Employee additions, especially in the IT segment, wilted to 80,000 during April-December 2020 compared with 2 lakh annually before the pandemic, partially restricting incremental leasing, it said.

A few large deals in the e-commerce, BFSI, and technology sectors in Bengaluru and Hyderabad did provide some support to leasing, but overall, the net leasing is estimated to decline 35-45 per cent to 20-25 million sq ft in the top six cities in fiscal 2021, it said.

“Despite limited expansion by corporates this fiscal, rationalisation of supply and deferment of a few projects to the next year have restricted vacancy build-up,” the agency's director Isha Chaudhary said, adding for the next fiscal, with 35 million sq ft of supply estimated to be completed, vacancy levels are likely to rise by 2-3 per cent across the top six cities.

Rental rates are set to drop by 3 per cent in fiscal 2021 and will continue to be “constrained” in the next fiscal, she said.

The agency said companies rated by it saw a comparatively lower impact due to the pandemic as the sample consists of marquee names, as well as assets under various REITs (real estate investment trusts).

Occupancy levels for the sample decreased marginally to 92.2 per cent on September 20 from 93.7 per cent on March 20, and the contracted rental rates are still below the market rental rates for 90 per cent of the tenants, it said.

“Around three-fourths of the leased area is occupied by tenants present in sectors having the low impact of the pandemic (such as IT or BFSI) or those with high financial strength. Furthermore, substantial investments in fit-outs by tenants and high market rentals have deterred tenants from vacating,” its director Anand Kulkarni said.

The overall situation continues to evolve. A shift towards flexible working options offered by employers and the protracted impact of the pandemic could affect rentals and occupancy in the commercial space and will remain key monitorable. PTI AA SHW SHW