India Ratings reiterates negative outlook on under-construction office space providers

India Ratings and Research (Ind-Ra) reiterates Negative Outlook on under-construction office space providers given the decline in occupancy levels and fresh leasing of commercial real estate.

The ratings agency is concerned that the sharp decline in occupancy levels reported by some of the major listed real estate investment trusts (REITs) and office real estate companies in 2020-21 could be a result of a weaker economy and the work-from-home phenomenon.

Excluding the impact of acquisitions, occupancy at large REITs focusing on office portfolios declined to 86.8% in the fourth quarter of 2020-21 from 92.2% in the first quarter. Occupancy at another listed REIT declined to 81.8% in the fourth quarter from 87.1% in the second quarter. Occupancies at other listed REITs and companies also declined by around 500 basis points over the last four quarters, India Ratings highlighted.

The private office space providers rated by the ratings agency have also shown deterioration in office occupancy and fresh leasing activities.

While the data from the listed REITs and companies rated by Ind-Ra clearly is raising concerns, the data provided from real estate consultancies projects a sanguine picture.

India Ratings notes the apparent discrepancy in the private data shared by the consultancies and the data available from listed REITs and companies and from private companies rated by the agency.

It believes that the negative demand created by the emergence of work-of-home option, along with a reduction in fresh leasing activities due to a weaker economy or work from home trends, can easily shave 40% off the annual demand over the next few years and result in over 500 basis points increase in vacancy levels over FY21-FY23.

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The impact on upcoming office space providers is likely to be particularly sharp as these may struggle to let out their upcoming properties.

A number of international companies have announced hybrid work models, where the employees will need to report to the office only on a few days of the week. It can be easy to infer that the space that may be subject to the hot desking model, may be a lot more than the 2.5% envisaged above.



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