Net leasing¹ of commercial office space² in India will stagnate this fiscal at 32-34 million square feet (msf), with global uncertainties brewing caution among key tenant categories. That said, the inherent strengths of the Indian market and increasing shift to return to office should help demand pick up over the medium term, keeping credit profiles of office asset owners stable.

India’s commercial office space is dominated by technology companies, with information technology (IT) and IT-enabled services (ITeS) companies occupying 42-45% of the operational stock. Global capability centres (GCCs)³ of multinational corporations have also emerged as a key category of tenants in the past few years, occupying around a third of the total stock. These two determinants will keep demand modest in the near term amid global economic headwinds.

Says Gautam Shahi, Director, CRISIL Ratings, “Net leasing of office space will be impacted by two factors this fiscal. One, headcount addition in the Indian IT/ITeS sector has already come to a halt amid tapering revenue growth and pressure on profitability. Plus, the sector may look to control costs, including rent. Two, GCCs may defer large-scale leasing plans in India amid weak macroeconomic outlook in key regions such as the US and Europe.”

On the other hand, demand from the domestic enterprises in the banking, financial services and insurance (BFSI), consulting, engineering, pharmaceuticals, and e-commerce segments, which occupy the remainder of India’s office area, 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. Most companies - including those in technology, which otherwise were favouring work-from-home - are now pushing for return to office on most days of the week. Physical occupancy, which averaged 40% last fiscal, is expected at 65-70% this fiscal.

Says Saina Kathawala, Associate Director, CRISIL Ratings, “Notwithstanding the near-term hiccups, net leasing is expected to grow 10-12% next fiscal to 36-38 msf. Growth is expected to remain at similar level over the medium term as well supported by both GCCs and domestic enterprises. GCCs are expected to drive office demand, given cost advantages⁴ of the Indian market vis-à-vis other developing markets as well as the availability of a skilled talent pool. Additionally, demand from domestic enterprises will remain healthy backed by strong financial health and good growth prospects.”

Given the sound medium-term outlook and adequate leverage, credit profiles of office operators will remain stable. A CRISIL Ratings analysis of office space owners with over Rs 70,000 crore debt and total leasable area of ~185 msf indicates as much.

The ratio of debt to earnings before interest, tax, depreciation and amortisation (EBITDA) and debt service coverage ratio will remain comfortable under 5.0 times and at 1.6-1.7 times, respectively, this fiscal and the next.

That said, the duration and intensity of the global economic slowdown and its impact on hiring as well as overall business plans of companies can impact future leasing and will bear watching.

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 705 msf as of March 2023 for seven major cities - Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR) and Pune.
³ Sectoral break-up comprises of Indian as well as foreign players and GCCs comprise of players operating in multiple sectors including IT/ITeS. Both data points are not mutually exclusive
⁴ Indian cities provide highly competitive rental rates. Average rentals in MMR, Bengaluru and NCR are Rs 130, Rs 90 and Rs 80 per square feet, respectively, way below Asian peers such as Shanghai (Rs 310), Seoul (Rs 230) and Manila (Rs 150). Rentals in India are significantly lower than global metro cities such as Singapore (Rs 640), Hong Kong (Rs 570), Tokyo (Rs 500), Sydney (Rs 390), London (Rs 610) and New York (Rs 560).