Ind-Ra Revises Outlook for India’s Commercial Real Estate Sector to ‘Neutral’ for FY24

India Ratings and Research (Ind-Ra) has revised its outlook for the commercial real estate sector (CRE) in India to ‘neutral’ for the fiscal year 2024, shifting from the ‘improving’ rating assigned in FY23. The revision is based on the agency’s anticipation of positive growth in absorption and steady rentals.

According to Ind-Ra, the total leasing (excluding renewals) in FY23 reached 32 million square feet (msf), compared to 26 msf in FY22. The significant increase in leasing demand can be attributed to occupiers returning to the office and the pent-up demand following the pandemic.

The agency expects the aggregate supply to remain stable, ranging from 7 to 9 percent on an annualized basis in FY24. Similarly, the total absorption is projected to be around 6 to 7 percent year-on-year, showing a decline from the estimated 24 percent in FY23 due to the base effect.

Based on data from real estate analytics firm Liases Foras, Bengaluru and Delhi-NCR are identified as the largest micro markets, with estimated absorptions of 10 msf and 8 msf, respectively.

Ind-Ra predicts reasonable growth in leasing and pre-leasing activities for Grade A office providers, as indicated by listed players. The implementation of return-to-office policies by technology companies and the pent-up demand mentioned earlier are expected to drive this growth. Furthermore, India’s global competitiveness in leasing rates and employee wages is considered a long-term structural driver.

Ind-Ra highlights a robust recovery in leasing activity within the office space segment. FY23 witnessed strong demand, making it one of the best years for leasing activity following the subdued FY21 affected by the COVID-19 pandemic.

The growth in India’s commercial realty sector has led to an increased focus on real estate investment trusts (REITs). Both developers and funds stand to benefit from REITs, as they provide higher cash flow visibility. However, Ind-Ra notes that elevated interest rates may reduce financial flexibility due to lower valuations, coupled with the mandatory distribution of 90 percent of the qualified cash surplus.

Ind-Ra emphasizes that multinational corporations account for 50 percent of the leasing demand. Concerns over a potential demand slowdown, as indicated by weak guidance from IT players for FY24, could impact the demand for new office spaces and hiring in India.

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