E-Paper
Urban consumption driving growth of retail malls; office segment faces pressure due to global headwinds
Several tenants choose to adopt a cautious approach given the global macroeconomic headwinds, resulting in slowdown in leasing activity in office space
Strong consumption trends are expected to drive the growth for retail mall operators whose rental income is expected to increase by 9-10% YoY in FY2024. However, the office segment, despite being resilient, is facing a slowdown in leasing from technology-based sectors due to global headwinds, a report by ICRA has said.
ICRA expects the rental income for mall operators to increase by 9-10% YoY growth in FY2024 and a mildly lower 8-9% in FY2025, driven by healthy occupancy levels, growth in trading values and rental escalations.
Across the top six cities in India, new supply of 9-10 million square feet (msf) and around 6 msf is expected in FY2024 and FY2025, respectively. Though the net absorption was healthy in 9M FY2024, the vacancy levels rose by 100 bps to 20% as of December 2023 due to higher new supply, which has become operational recently and is yet to ramp up fully. ICRA expects the occupancy levels to sustain at 81-82% as of March 2024 (PY: 81%) and improve to 82-83% by March 2025.
Also Read: New supply of retail space expected to increase by 45% by 2028: Report
“Backed by expected growth in footfalls, increase in spend for footfall driven by premiumization and strong urban consumption, ICRA projects the trading values to improve by 14-15% in FY2024 and record 10-12% expansion in FY2025 on a high base for retail malls. However, the increase in digital penetration and continued threat from e-commerce players particularly in the retail (fashion) segment which is extending to some of the premium brands is a major challenge for the retail mall developers,” said Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA.
The credit profile of the mall operators is expected to remain stable.
Office segment – Global macroeconomic headwinds loom over office leasing
ICRA estimates the net absorption of office leasing across the top six cities in India to decline by 19-20% to around 47-48 msf in FY2024 and witness a mild growth of 4-5% in FY2025. With the influx of a huge supply of around 60-62 msf each in FY2024 and FY2025, the vacancy levels are expected to inch up to 16.0%-16.2% during FY2024 and FY2025 from 15.5% in FY2023 as supply is expected to outpace absorption, the report said.
“For the office segment, despite an increase in physical occupancy, several tenants chose to adopt a cautious approach given the global macroeconomic headwinds, resulting in slowdown in leasing activity in the technology-based sectors. This was also visible from a decline in net absorption by 17% YoY in 9M FY2024 for the top six cities. However, the demand from global capability centres (GCCs), non-IT MNCs and domestic corporates remained healthy, supporting the leasing levels,” she said.
In December 2023, the Government of India announced a partial and floor-wise denotification of IT-SEZs, which is expected to revive their attractiveness in the medium term. Favorable demographics, a highly skilled and cost-effective talent pool, availability of high-quality office spaces at competitive rentals, would continue to drive demand for the Indian office portfolio in the medium to long-term, ICRA said.
The credit profile of ICRA’s sample set of office players is expected to remain stable.
Growing preference by occupiers for Grade A, ESG-compliant warehouses
There is a growing preference by the occupiers for Grade A, ESG-compliant warehouses with modern storage solutions. Over the last five years, the supply of grade A warehouses has grown at a healthy CAGR of 24% to 166 msf in FY2023 and is expected to be around 195 msf in FY2024, with an estimated increase of 15-16% YoY in FY2025.
Also Read: Industrial & Logistics leasing in MMR touches high of 9.9 mn sq ft: report
“ICRA anticipates the credit profile of the warehousing players to remain Stable. The occupancy levels are likely to remain high at 95% in FY2025, driven by e-commerce, 3PL and manufacturing-led demand. The rental income and the NOI are expected to grow by around 30-32% in FY2025, supported by the commencement of rentals from newly added capacities and scheduled rental escalations,” said Reddy.
