Under construction projects likely to face stress in FY22: Ind-Ra

India Ratings and Research (Ind-Ra) expects the commercial real estate sector to show stable performance in the financial year 2021-22 but under construction projects are likely to face stress.

The situation of retail space providers is gradually improving from a low base and Ind-Ra expects normalisation of the business over the next 12 months.

Ind-Ra expects double-digit growth in India's GDP in FY22, albeit on a low base which is likely to result in a sharp year-over-year upswing in rent collection for retail space providers but this could still be somewhat below FY20 level in 1H FY22.

The economic recovery is likely to help office space providers as well. However, the agency remains concerned about the long-term impact of increased adoption of the work-from-home culture on office space demand.

Some return to work-from-office is likely to gain momentum as the vaccination programme advances.

Flexible working options have been prevalent in workplaces over the past 12 months which can be a long-term threat to office absorptions.

IT and IT-enabled services sector compes which account for about 40 per cent of office lessees in India have started adopting innovative flexible or hybrid options, hot desk policy, focusing on reducing floor space apart from permanent work from home.

The company expects net new absorptions in FY22 and FY23 to be around 40 per cent below the average level seen in FY19 and FY20 which is likely to result in an overall increase in vacancies to 19.3 per cent by March 2023 from 14.7 per cent in December 2020. Rising vacancies could result in a somewhat difficult environment to lease out new under-construction office properties.

Ind-Ra has seen few instances of office lessees cancelling their leases. It appears that the lessees are still evaluating their long-term work-from-office policies. As office lessees have to incur substantial upfront fit-out costs while moving into new premises, they are likely to be extremely cautious before cancelling any leases.

Ind-Ra does not expect mass-scale lease cancellations over FY22. In addition, most of the tenants for Grade A office space providers tend to be large and reputed Indian and multinational compes. These are not likely to default on their lease agreements either.

However, better clarity is likely to emerge starting FY23 on whether work from home is a permanent option and it may result in some lease cancellations as well.

Ind-Ra expects little long-term damage to retail space providers from the pandemic. Therefore, it does not see a major rating downside risk for entities with ample liquidity.

( With inputs from ANI )