India Ratings and Research has changed the sector's outlook to neutral for FY24

India Ratings and Research (Ind-Ra) has revised the outlook for the commercial real estate sector (CRE) to ‘neutral’ for FY24 from the ‘improving’ rating assigned in FY23 anticipating positive growth in absorption and steady rentals. It noted that total leasing (excluding renewals) in FY23 was 32 msf pf million square feet (FY22: 26 msf). The strong leasing demand was largely attributed to return-to-office by occupiers and pent-up demand in the wake of the pandemic.

The agency expects aggregate supply to remain steady at 7 to 9 percent on an annualised basis in FY24. Similarly, total absorption is likely to be close to 6 to 7 percent year-on-year, dipping from an estimated 24 percent in FY23 (base effect). As per real estate data analytics firm Liases Foras, Bengaluru and Delhi-NCR remain the largest micro markets with an estimated absorption of 10 msf and 8 msf, respectively.

Ind-Ra expects reasonable growth in leasing and pre-leasing activity of Grade A office providers, as reported by listed players. This stems from technology companies implementing return-to-office policies, and the aforementioned pent-up demand. India’s global competitiveness in leasing rates and employee wages are seen as a long-term structural drivers.

Ind-Ra tracked strong demand for leasing activity in the office space segment. FY23 was one of the best years for leasing activity after a subdued FY21 where leasing was impacted by the COVID-19 pandemic, the agency said.

Growth in commercial realty is now reflected in an increased focus on real estate investment trusts (REITs). Both developers and funds tend to benefit as REITs provide higher cash flow visibility. Elevated interest rates typically reduce financial flexibility due to lower valuation amid the mandatory distribution of 90 percent of the qualified cash surplus, Ind-Ra said.

The agency said that 50 percent of the leasing demand comes from multinational corporations. The fear of a demand slowdown (all IT players have given a significantly weak guidance for FY24) could impact demand for new office spaces and hiring in India, it added