Moneoths.com

Breaking News Building Knowledge

Real Estate

Uptick in office occupancy, rent to come with a lag despite SEZ denotification

The much-awaited amendments in the SEZ regulations, while a positive development for the commercial real estate sector, are unlikely to have any immediate impact on SEZ occupancies and on office rents, which are likely to take some time to go up.

Last week the government issued a notification allowing floor-wise denotification of SEZ spaces into non-SEZ use within information technology and IT-enabled services SEZ parks. It was hailed as a positive move by office and commercial space owners including Real Estate Investment Trusts (REITs) sitting on considerable SEZ inventory.

Office demand continues to be subdued especially among the IT/ITES segment and a recent report by CREDAI-CRE Matrix forecast office absorption in 2023 at around 55-57 million square feet, much lower compared to 70 msf last year. With demand for housing continuing unabated residential development is proving to be more attractive compared to office development.

The higher vacancies mean lower room for rental growth making office unattractive for developers, especially with residential prices rising every quarter. 

Compared to 20-100 per cent increase in prices across cities from pre-Covid times, office rents have been fairly stagnant due to the higher vacancies.

SEZ vacancies

The total SEZ stock across the top six cities – Bengaluru, Chennai, Delhi-NCR, Hyderabad, Mumbai and Pune – is 173 msf and the pan-India vacancy is at around 19 per cent, according to data from Colliers.

Hyderabad has the highest vacancy at 29 per cent, followed by Mumbai at 24 per cent. Bengaluru has the least vacancy at 12 per cent followed by Pune at 18 per cent.

The IT and ITES SEZs comprise about one-third of the total office stock. The headwinds that the sector is battling and a slowdown in the major economies leading to delays in decision-making on taking up real estate space are challenges for the sector.

Among office landlords, builder DLF Ltd and two REITs, Mindspace Business Parks REIT and Embassy Office Parks REIT have SEZ space ranging from 46-58 per cent of their portfolio, according to a note by Jefferies, higher than the pan-India average. The brokerage firm said that the large office owners could benefit the most from the changes in SEZ rules.

“There will be better utilisation of SEZ spaces now, than prior to the notification,” countered Vivek Rathi, head of research at Knight Frank India.

Rathi pointed out that with the denotification, restrictions on such spaces had been removed for other occupiers. “They’ll also become eligible for such spaces now,” he added.

Stagnant office rents

The high vacancies and low demand have kept office rents stable, a disincentive for builders to develop office spaces.

In 2021 and 2022 several frontline builders, enthused by the unprecedented demand for housing and the scope to raise prices, had said that they would be focusing on building residences since that was where they were getting all their cashflows. Even now bulk of the real estate developers’ resources are directed toward the residential segment.

Though fresh stock of high quality office space is yet to come into the market, the existing vacancies are high enough to keep rents low. Jefferies said that the SEZ notification is unlikely to create new demand.

Rathi said that SEZ spaces were of very high quality and due to the sunset clause in 2020 and removal of direct tax benefits such spaces have started going at a discount to the non-SEZ areas. This could make them more attractive for prospective occupiers.

For instance, the rents at DLF Cyber City SEZ are at a 30 per cent discount to non-SEZ rents in the vicinity, according to Jefferies.

LEAVE A RESPONSE

Your email address will not be published. Required fields are marked *