Strong demand from key sectors like banking, financial services, insurance (BFSI), and global capability centres (GCCs), along with the growing presence of flex space operators, is expected to drive an 8-10 per cent increase in net leasing of Grade A commercial office space in India. This growth will reach 47-49 million sq ft (msf) in the coming fiscal year. This follows a remarkable surge of 14-16 per cent in the current fiscal, which has exceeded earlier predicted and surpassed pre-pandemic levels.
A steady cash flow from contracted rental escalations, a slight improvement in occupancy rates, and prudent leverage are projected to keep Crisil-rated commercial real estate office players' credit profiles healthy. The forecast is supported by a Crisil Ratings analysis of office space owners, who own around 195 million sq ft of leasable area, roughly one-quarter of the total Grade A office space across India's top seven cities.
GCCs remain a key driver, accounting for 30-40 per cent of all net leasing activity in India across numerous sectors, including IT/ITeS, BFSI, and manufacturing. As new GCCs arise and current ones expand, leasing demand is likely to grow, particularly in Bengaluru and Hyderabad (which represent around two-thirds of GCC demand). India's large skill pool and economic advantages have allowed GCCs to move beyond their traditional position of providing support services. Instead, they combine company activities and establish strategic hubs that use cutting-edge technologies.
Gautam Shahi, Director of Crisil Ratings, said, "From a sectoral perspective, 8-10 per cent growth in net leasing next fiscal will be driven by double-digit growth of BFSI players and flex space operators. Non-banking financial companies and private sector banks will see steady growth emanating from higher assets under management and employee additions. Flexible operators will expand rapidly in Tier I and II cities as they offer companies agile, cost-effective, and hybrid-friendly solutions. In contrast, growth in the IT/ITeS, manufacturing, and engineering segments will remain moderate, with demand rising around the mid-single digit."
With leasing growth expected to continue, developers maintain a healthy pipeline of new office spaces. Around ~52 msf of Grade A office space is expected to be completed in the current fiscal year, followed by 55-58 msf next year. Much of this new supply will be concentrated in Bengaluru and Hyderabad, supported by the demand from GCCs.
As the growth in the supply of office space is expected to lag slightly behind the rise in net leasing, vacancy rates are anticipated to decrease to around ~17 per cent over the next two fiscal years.
For Crisil-rated office players, vacancy levels are likely to reduce to 7-9 per cent by the next fiscal end, compared with 11 per cent in September 2024, driven by an upswing in net leasing demand and denotification of vacant space under the amendments in the Special Economic Zone Act, 2005, announced in December 2023.
Snehil Shukla, Associate Director, Crisil Ratings, said, "Improving occupancy levels and steady rental growth will increase the cashflows of Crisil-rated office players, keeping credit profiles healthy even as players expand their portfolios. This is reflected in the debt-to-Ebitda ratio, projected to remain stable at 4.3-4.5 times this fiscal year and the next (4.5 times in fiscal 2024)."
However, any slowdown in economic growth or unfavourable changes in global regulations that affect hiring and business expansion could impact leasing activity and warrant close monitoring. Additionally, maintaining prudent leverage by these players will remain a critical factor to watch.
