The commercial real estate segment managed to sail through FY23 despite a lacklustre second half. Even so, some key parameters have shown improvement. For instance, the aggregate vacancy for offices in the top seven Indian cities fell in the March quarter (Q4FY23) compared to Q3. Further, in FY23, the leased area increased by 8% year-on-year (y-o-y) to 524 million square feet with record absorption, said a Kotak Institutional Equities report dated 5 June.
However, repeating the same feat in FY24 would be a tall order now given the array of challenges. “The robust growth seen in the office real estate market in the first half of FY23 was short-lived. The slowdown in major economies of the world cast a shadow on the Indian office market in the second half,” said Prashant Thakur, senior director and head – research at property consultant Anarock Group.
To begin with, the information technology (IT) sector, a key driver of Grade-A office property leasing in India, is currently dealing with demand uncertainty. So, the pace of hiring has lost steam. “The IT sector is in the middle of a slowdown, with tier-1 IT companies seeing a reduction in headcount in Q4FY23 at around 9.4k employees in comparison to an average quarterly addition of over 50k in the past 10 quarters,” added the Kotak report.
A lingering worry is that the lack of clarity on global macro-economic conditions could keep global IT giants in wait-and-watch mode, leading to slower hiring and lower outsourcing of work to India. Plus, given the funding-led issues, demand from startups is also likely to remain muted in the near term. Some analysts also point to re-emergence of the hybrid working model as companies try to save costs.
According to Thakur, the current challenging scenario in the Indian office market could continue till the first half of 2024 as many IT/ITeS companies have scaled down their business. Subdued demand could keep vacancies higher and occupancies lower, consequently weighing on rentals. In FY23, the average rentals of Grade A offices pan India reached ₹79 per sq feet/month, a 4% y-o-y increase, showed Anarock data. Among key cities, Pune and Bengaluru saw the highest improvement in rentals in FY23, rising 10% and 9%, respectively. But the catch here is that this was largely driven by rising input costs and not because demand is reviving. The outlook is not rosy. “We may see the office market remain stagnant in these two cities as well, largely because of the global headwinds and its impact on Indian markets. Many large corporates are holding on to their expansion plans and treading cautiously and both these markets are driven by these corporates’ demand,” added Thakur.
Further, the delay in implementation of the Development of Enterprise and Service Hubs (DESH) Bill, which is crucial for special economic zones (SEZs), has led to operational SEZ space remaining vacant. This is a dampener for key listed office REIT managers such as Embassy Office Parks Reit, Mindspace Business Park Reit and Brookfield India Real Estate Trust. Little wonder that these companies have refrained from giving concrete guidance for FY24.
To be sure, even after the required clarity on DESH bill comes, the demand recovery would be gradual, at best.
“In our view, even if the regulatory amendment comes through in H1FY24, the process of de-notification and leasing of vacant spaces will only close by end-FY2024,” added the Kotak report. So far in 2023, stocks of the aforementioned Reits have fallen by 6-10%. This comes at a time when shares of residential realty companies have fared well.
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Updated: 12 Jun 2023, 10:14 PM IST