Net leasing¹ of commercial office space² will grow 10-15% on-year this fiscal to 23-28 million square feet (msf) across the top six cities³, driven by three salutary tidings — return to office as the impact of Covid-19 wanes; increased hiring in key sectors; and, expectation of healthy economic growth.

It will, however, stay below the pre-pandemic run-rate of 35-40 msf on continuing caution amid hybrid work models.

The pick-up will raise occupancy and keep the credit profiles of commercial realtors healthy, a CRISIL Ratings analysis of 68 of them with over Rs 50,000 crore of debt and total leasable area of ~150 msf, indicates.

Says Aniket Dani, Director, CRISIL Research, “With higher leasing, occupancy is expected to improve by 100-150 basis points this fiscal from 83.5-84.0% in the last, inching closer to the pre-pandemic levels of 86-87%. Sectors such as IT/ITeS and BFSI have driven a sharp rebound in net leasing buoyed by demand recovery starting last fiscal. Amid a return to normalcy and subdued impact of the third wave, the number of employees working from office has increased over the past six months and the trend should continue.”

After nosediving 45-50% in fiscal 2021, with many rental agreements either retracted or revised, net leasing space saw some upturn in fiscal 2022 (see chart in annexure). Of the top six cities, Bengaluru, Hyderabad and Pune saw the most recovery as IT, BFSI and consulting are the dominant sectors in these markets. Bengaluru and Hyderabad will likely lead the charge this fiscal with a 15-20% uptick.

Completions are expected to taper gradually this fiscal and inventories should see some rationalisation as some developers had deferred capex amid the pandemic — even as demand continues to be steady.

Despite reduced occupancy during the pandemic, the credit profiles of commercial realtors remained resilient — less than 5% saw rating downgrades and around 9% actually had rating upgrades during the two fiscals through March 2022. With recovery in sight this fiscal, the credit profiles should improve as increased leasing and reduced vacancy will result in lower reliance on debt, unlike the past two fiscals.

Says Kshitij Jain, Associate Director, CRISIL Ratings, “Leverage is expected to correct to pre-pandemic levels, with debt to earnings before interest, tax, depreciation and amortisation expected at 4.7 times by the end of this fiscal compared with 5.2 times a year earlier. The improvement in credit profiles will also be driven by better collections because of ebbing of pandemic.”

Demand recovery, low supply over the near term, and healthy leverage augur well for the industry. That said, any significant increase in debt due to acquisitions, capital expenditure or dividend distribution will remain a monitorable.

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 560 msf as of March 2022
³ Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, Pune, Kolkata and Hyderabad