Mumbai- Commercial office space leasing is likely to stagnate at 32-34 million square feet in the country this fiscal due to the lingering global uncertainties which are spawning caution among key tenant categories, says a report.

However, the inherent strengths of the domestic commercial realty market and the increasing shift to return to office should help demand pick up over the medium term, helping keep the credit profiles of office asset owners stable, Crisil Ratings said in a report on Monday.

The domestic commercial office space is dominated by technology companies, with IT and IT-enabled services companies occupying 42-45 per cent of the operational stock. Global capability centres of multinational companies have also emerged as a key category of tenants in the past few years, occupying around a third of the total stock. These two will keep demand modest at 32-34 million square feet this fiscal in the near-term amid global economic headwinds, the report noted.

According to Gautam Shahi, a director with the agency, net leasing of office space will be impacted by two factors this fiscal. One, headcount addition in the IT/ITeS sector has already come to a halt amid tapering revenue growth and pressure on profitability.

Also, the sector may look to control costs, including rent. Secondly, global capability centres may defer large-scale leasing plans in the country amid weak macroeconomic outlook in key regions such as the US and Europe.

However, demand from domestic enterprises in the banking, financial services and insurance, consulting, engineering, pharma, and e-commerce segments, which occupy the remainder of the office market, will remain buoyant, resulting in net leasing of 32-34 msf this fiscal, same as that in fiscal 2023.

Employers pushing for increased physical occupancy in offices may prove to be another tailwind for office leasing, he notes and adds that most companies, including those in technology, which otherwise were favouring work-from-home, are now pushing for return to office on most days and physical occupancy, which averaged 40 per cent last fiscal, is expected at 65-70 per cent this fiscal.

According to Saina Kathawala, an associate director with the agency, notwithstanding the near-term hiccups, net leasing is expected to grow 10-12 per cent next fiscal to 36-38 msf. Growth is expected to remain at a similar level over the medium term as well supported by both global capability centres and domestic enterprises.

Global capability centres are expected to drive office demand, given cost advantages of the domestic market as well as the availability of skilled talent pool.

Given the sound medium-term outlook and adequate leverage, credit profiles of office operators will remain stable, says the report which is based on an analysis of office space owners with over Rs 70,000 crore debt and total leasable area of 185 msf indicates as much.

The report is based on Grade-A office space with an operational stock of around 705 msf as of March 2023 across Bengaluru, Chennai, Hyderabad, Kolkata, the Mumbai metropolitan region, the national capital region and Pune.

These cities provide highly competitive rentals which average in MMR, Bengaluru and NCR at Rs 130, Rs 90 and Rs 80 per square feet, respectively, which is way below Asian peers such as Shanghai (Rs 310), Seoul (Rs 230) and Manila (Rs 150). Domestic rentals are significantly lower than Singapore (Rs 640), Hong Kong (Rs 570), Tokyo (Rs 500), Sydney (Rs 390), London (Rs 610) and New York (Rs 560).  (PTI)


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