ICRA’s recent report on the real estate sector highlights a varied landscape across different segments. While retail mall operators and warehousing sectors benefit from strong consumption trends, the office segment faces a slowdown in leasing, particularly from technology-based sectors due to global challenges.
Retail outlook
For retail mall operators, ICRA projects a steady growth trajectory, with rental income expected to rise by 9-10% year-on-year in FY2024, slightly moderating to 8-9% in FY2025. This growth is fueled by healthy occupancy rates, increased trading values, and rental escalations. Despite healthy absorption rates, vacancy levels have ticked up to 20% as of December 2023 due to recent operational expansions. However, occupancy levels are anticipated to stabilize at 81-82% by March 2024 and improve further to 82-83% by March 2025.
Anupama Reddy, vice president and co-group head, corporate ratings, ICRA, notes a strong rebound in footfalls and trading values for retail mall operators, with projected growth rates of 14-15% in FY2024 and 10-12% in FY2025. While certain segments like jewellery, electronics, and entertainment witness above-average consumption growth, challenges persist from digital penetration and e-commerce competition, particularly affecting the fashion retail segment.
Despite these challenges, the credit profile of mall operators is expected to remain stable, with leverage ratios likely to improve to 5.0-5.2 times as of March 2024. Additionally, the logistics and warehousing sector is experiencing rapid growth, attributed to factors such as e-commerce expansion, increasing consumption demands, and government initiatives to bolster manufacturing. Grade A, ESG-compliant warehouses with modern storage solutions are increasingly preferred by occupiers, driving significant growth in supply, which is expected to continue in the coming years.
Warehousing outlook
The rapid expansion of emerging fields like e-commerce has sparked a sharp rise in demand for warehousing facilities. This surge is further fueled by the burgeoning needs of the vast consumer market and the government’s emphasis on positioning India as a manufacturing powerhouse. Additionally, occupiers are increasingly inclined towards Grade A, ESG-compliant warehouses equipped with modern storage solutions.
Over the past five years, the supply of Grade A warehouses has demonstrated robust growth, achieving a healthy Compound Annual Growth Rate (CAGR) of 24%, reaching 166 million square feet (msf) by FY2023. Projections indicate that this figure is set to increase to approximately 195 msf by FY2024, with an anticipated yearly growth of 15-16% in FY2025.
Speaking about it, Reddy said: “ICRA anticipates the credit profile of the warehousing players to remain Stable. The occupancy levels are likely to remain high at 95% in FY2025, driven by e-commerce, 3PL and manufacturing-led demand. The rental income and the NOI are expected to grow by ~30-32% in FY2025, supported by the commencement of rentals from newly added capacities and scheduled rental escalations. The leverage measured by debt/NOI is expected to remain comfortable in the range of 5.3-5.5 times in FY2025, improving from around 6.3 times in FY2024 following healthy growth in the NOI. The coverage indicators measured by the DSCR are forecast to remain around 1.55 times in FY2025, improving from 1.4 times in FY2024.”
Office spaces outlook
ICRA projects a notable decrease in the net absorption of office leasing across India’s top six cities, estimating a decline of 19-20% to approximately 47-48 million square feet (msf) in FY2024. However, a mild recovery is anticipated in FY2025, with a projected growth of 4-5%. Despite this, the influx of substantial supply, expected to reach around 60-62 msf each in FY2024 and FY2025, is likely to lead to a rise in vacancy levels. Forecasts suggest vacancy rates could increase to 16.0%-16.2% during FY2024 and FY2025, up from 15.5% in FY2023, as the supply is anticipated to outpace absorption.
