Net absorption to dip 10% year-on-year in FY24 for office leasing segment: ICRA
NEW DELHI: The net absorption of office leasing across the top six cities in India to decline by 10% year-on-year in FY24, according to ICRA.
This along with an influx of huge supply in FY24, would result in marginal rise in vacancy levels by 60 bps to 15.5% by the end of FY24.
The office developers are expected to witness a revenue growth of 11-13% in FY24 supported by scheduled rent escalation and improvement in occupancy levels of reputed office players.
The rental rates are estimated to rise by 3-5% year-on-year in FY24, driven by contracted escalations/lease renewals at higher rates. ICRA’s outlook on commercial office sector is Stable.
The net absorption of office leasing stood at ~57 million sq ft in FY23 similar to FY20 levels (22 million sq ft in FY21 and 33 million sq ft in FY22).
Physical occupancy increased to around 65% as of June 2023 from 25% in June 2022.
Anupama Reddy, vice president and co-group head, Corporate Ratings, of the company said, “Given the global macroeconomic headwinds, many tenants chose to adopt a cautious approach while going ahead with the expansion plans. This can also be seen from a decline in the net absorption by 40% year-on-year to 9.6 million sq ft in Q1 FY24 from 13.4 million sq ft in Q1 FY23. The large space-takers are expected to continue to adopt a wait-and-watch approach in the near term, which is expected to result in a 10% year-on-year moderation in net absorption levels in FY24.”
As on June 30, 2023, the total grade A office stock in the top six markets stood at around 880 million sq ft, with Bengaluru having the highest supply of 27% followed by Delhi-NCR and the Mumbai Metropolitan Region.
During FY23, Hyderabad pipped Bangalore in overall supply addition, which is expected to continue in FY24. The supply is estimated at around 63-64 million sq ft in FY24, with Hyderabad accounting for 34%, followed by Bengaluru (23%) and Pune (13%).
“The credit profile of the office players is expected to remain stable, driven by healthy growth in net operating income (NOI) backed by higher rentals and consequently, the leverage metrics of the players as measured by debt/NOI is expected to improve to 5.3x-5.8x in FY24, from 6.3-6.8x in FY23. Even after factoring in the increase in interest rates, the coverage metrics is expected to improve and remain healthy at 1.25x-1.30x in FY24, compared to 1.05-1.10x in FY23, on the back of improved NOI,” said Reddy.
