The outlook for commercial real estate, both of the office segment and the retail malls segment is expected to be stable for FY23, said rating agency ICRA. The revision in the outlook for retail malls to Stable from Negative factors in the improvement in rental incomes backed by contractual escalations in rentals and strong rebound in trading density, according to an analysis by ICRA.
The net absorption in the commercial office sub-segment is expected to rise to 28msf in CY2022 from 20 msf and 19 msf in CY2021 and CY2020, respectively. While the net absorption in CY2020-CY2021 was impacted due to the COVID-19 pandemic, it is expected to improve in this calendar year backed by resumption of back to office plans and growth in hiring by corporates. However, the net absorption is expected to be lower than CY2019, when the metric was highest in the last seven years at 41 msf.
Significant supply additions of around 50 msf in CY2022, driven majorly by Hyderabad and Bengaluru markets, is likely to result in an increase in overall vacancies to 18.4-19.4 percent by end of the year, up from 16.4 percent in CY2021. The rentals are expected to remain steady for Grade A properties in established micro-markets, despite potential expansion in vacancy levels, it said.
“ICRA expects a revenue growth of around 5 percent (excluding impact of acquisitions and new capex) led by improvement in occupancy, contracted rent escalations and mark-to market growth on renewals. The leverage levels for the entities which have been impacted due to an increase in vacancy due to pandemic is expected to improve in CY2022 with the expected improvement in occupancy.
"Overall, leverage (Debt/NOI) is expected to be maintained in the range of 6x-8x in CY2022 for majority of the non-REIT rated universe. Backed by stable cash flows and long-term loan structures, debt coverage metrics are also expected to be stable,” said Mathew Kurian Eranat, vice president and co-group head, ICRA.
The demand drivers for retail malls stems from the relaxation in permitted occupancies of multiplexes, along with the release of multiple big budget films and improved footfalls and sharp recovery in retail consumption. The outlook in office space continues at Stable and is supported by the resumption of back to office plans; robust hiring in tech sector with strong growth in the sector along with expected growth from global capability centres (GCC).
“The footfalls are expected to reach pre-Covid levels in FY23, however, the average spend per footfall is likely to witness some moderation when compared to FY21-FY22. The rental income of malls in FY23 is expected to surpass FY20 levels by around 4-6 percent. The revenue is expected to grow by 45 percent Y-o-Y in FY23 on a contracted base in FY22 and support for an improvement with operating profitability of around 60-70 percent in FY23 (similar to pre-Covid levels) from 45-55 percent levels in FY21 at the peak of the pandemic,” he said.
The Debt-to-OPBDITA ratio is expected to ease to 6x-8x in FY2023 from the elevated levels of >12x in FY2021, with expected improvement in OPBDITA as various operating metrics improve to the pre-pandemic levels. The Debt service coverage ratio, which declined to <1x in FY2021-FY2022 is expected to increase to 1.10-1.20x in FY2023 backed by improvement in rental recoveries, he said.
The trading values in FY2023 are also expected to surpass pre-Covid levels. Trading value had been significantly impacted during FY21 and FY22 due to pandemic induced lockdowns and restrictions, despite a jump in average spend per footfall that partly offset the decline in footfalls. On the flip side, demand growth can be impacted in case of any severe future Covid-19 waves leading to restrictions by state and central governments, the analysis noted.
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