Non-IT services tenants, SEZ conversions aid occupancies in REITs
Offices and specifically real estate investment trusts are no longer relying on IT services tenants, whose share in office occupancies has dropped sharply, partly due to the slowdown in the segment and a surge in leasing by manufacturing and BFSI segments.
The slowdown in the software services sector ever since the pandemic has been a drag on office occupancies but of late that slack has been taken up by others sectors and Global Capability Centres, where there has been a return in demand.
At Embassy Office Parks REIT, for instance, IT services tenants occupy less than 10 per cent of its rental portfolio. In fact in Q2 bulk of its total exits of 6 lakh square feet was due to IT services occupiers. GCCs accounted for over half of the total leasing in the quarter, mainly from BFSI and technology sectors.
Similar is the case with Mindspace Business Parks REIT, which has also seen a drop in tech leasing. Engineering and manufacturing companies accounted for 42 per cent of the leasing, 17 per cent from co-working operators and manufacturing and process around 12 per cent. It signed on two GCCs during the quarter and is in advanced talks with another GCC as a prospective tenant for a building coming up in Kharadi.
Brookfield India Real Estate Trust, which was hit by exits by tenants in the IT and IT services segments, has only 26 per cent of its tenant base in the technology sector.
SEZ denotification boost
Another major factor that is boosting occupancies in the office portfolios at REITs is the denotification of the SEZ areas, which had previously kept vacancy levels high.
The inventory of SEZ areas has been a hangover on REITs and since floor-wise denotification was allowed last year, it has freed up crucial space for office landlords and increase their occupancy levels.
Embassy REIT, which has denotified around 5.3 msf of SEZ areas over the past year has managed to lease out 80 per cent of them, while another 1.4 msf is in the process of being freed up.
Mindspace REIT received approval for demarcation of 1.2 msf of SEZ space and so far it has denotified 2.1 msf space. It has leased out 45 per cent of that. Its committed SEZ occupancy is at 90.8 per cent, an indication of how fast it has been converting its SEZ assets.
Brookfield has more SEZ assets compared to its competitors and around 19 per cent of that space is vacant, translating into 2.8 msf. Of this 1.3 msf is under conversion and the REIT has indicated a leasing pipeline of 2.2 msf against that.
Embassy Office Parks REIT ended the quarter with an occupancy of 87 per cent by area, Mindspace Business Parks REIT at 91.7 per cent and Brookfield India Real Estate Trust at 85 per cent.
Average physical occupancies at offices in India are in the range 75-85 per cent.
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