The outlook for Indian commercial real estate presents a mixed bag across segments with strong consumption trends driving the growth for retail mall operators and warehousing sectors. However, the office segment, despite being resilient, is facing a slowdown in leasing from technology-based sectors due to global headwinds, says ratings agency ICRA.

The agency anticipates the rental income for mall operators to increase by 9-10% year-on-year (YoY) in FY24 and a slightly lower 8-9% in FY25, driven by robust occupancy levels, growth in trading values and rental escalations. New supply of 9–10 million square feet (msf) and roughly 6 msf is anticipated across India's top six cities in FY24 and FY25, respectively. Despite a strong net absorption in the 9M FY24, higher new supply that has just recently started operating and hasn't yet reached full capacity is the cause for the vacancy levels, which increased by 100 basis points to 20% as of December 2023. ICRA expects the occupancy levels to sustain at 81-82% as of March 2024 (PY: 81%) and improve to 82-83% by March 2025.

Anupama Reddy, vice president and co-group head, Corporate Ratings, ICRA, says, “Retail mall operators witnessed a strong rebound in FY2023 in terms of footfalls and trading values and the trends continued in 9M FY24. Backed by expected growth in footfalls, increase in spend for footfall driven by premiumisation and strong urban consumption, ICRA projects the trading values to improve by 14-15% in FY24 and record 10-12% expansion in FY25 on a high base.”

Segments like jewellery, electronics, apparels, beauty care products of premium brands, and entertainment witnessed above-average consumption growth in recent quarters, which is expected to continue in the near to medium term with strong consumer demand.

“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 retail mall developers,” Reddy notes.

Warehousing sector

Demand for warehouse space has sharply increased as a result of the government's focus on positioning India as a manufacturing hub, the fast growth of new-age industries like e-commerce and related services, the logistics and warehousing sector being granted ‘infrastructure’ status, and the growing needs of the massive consumer market.

“Moreover, 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 FY23 and is expected to be around 195 msf in FY24, with an estimated increase of 15-16% YoY in FY25,” says the report.

Office segment

ICRA forecasts the net absorption of office leasing across the top six cities in India will decrease by 19-20% to nearly ~47-48 msf in FY24 and witness a modest growth of 4-5% in FY25. The vacancy rates are anticipated to gradually increase from 15.5% in FY23 to 16.0%–16.2% in FY24 and FY25 due to the massive influx of roughly 60–62 msf annually in these years. This is because supply is anticipated to surpass absorption.

“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 FY24 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,” says Reddy.

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