Net leasing¹ of commercial office space² in India will grow 10-15% this fiscal and in the next one to 28-30 million square feet (msf) and 31-33 msf, respectively, riding on improvement in demand as employers increasingly favour employees working from office, albeit with some flexibility.

Demand will be below the pre-pandemic high of ~42 msf in fiscal 2020, but within sniffing distance of the fiscal 2019 mark of ~34 msf. 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 competitiveness³ 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.

A CRISIL Ratings analysis of players with over Rs 63,000 crore debt and total leasable area of ~170 msf indicates as much.

Says Anand Kulkarni, Director, CRISIL Ratings, "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. One, the IT/ITeS sector, which accounts for ~45% of India’s office leasing space, will continue to witness low single digit employee addition⁴ in the current and next fiscal. Two, physical occupancy at offices across sectors, will increase from 30-50% at present. Three, 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."

To be sure, 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% this fiscal, against our earlier expectation of an improvement by 100-150 bps, due to deferment of leasing plans. Notwithstanding, the occupancy level is expected to inch up by ~100 bps to 85-86% next fiscal as leasing activity picks up.

Says Saina Kathawala, Associate Director, CRISIL Ratings, “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. 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.”

That said, any significant increase in debt due to acquisitions, capital expenditure, or dividend distribution will bear watching. The duration and intensity of the global economic slowdown and its impact on hiring as well as overall business plans are key monitorables, too.

¹ Net leasing refers to absorption of new office space less space vacated by tenants
² Represents Grade-A office space with an operational stock of around 670 msf as of March 2022 for seven major cities - Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR), and Pune
³ Indian cities provide highly competitive rental rates. Approximate average rentals in MMR, Bengaluru and NCR are at Rs 130, Rs  95 and Rs 80 per square feet, respectively, way below other Asian peers such as Shanghai (Rs 275), Seoul (Rs 200), and Manila (Rs 150). Rentals in India are significantly lower than global metro cities such as Singapore (Rs 650), Hong Kong (Rs 500), Tokyo (Rs 550), Sydney (Rs 400), London (Rs 600), New York (Rs 550) etc.
⁴ On an overall employee base of 3.4 million for IT and ITeS segment; as per CRISIL Research