Urban consumption driving growth of retail malls; office segment faces pressure


Strong consumption trends are expected to drive the growth for retail mall operators whose rental income is expected to increase by 9-10% YoY in FY2024. However, the office segment, despite being resilient, is facing a slowdown in leasing from technology-based sectors due to global headwinds, a report by ICRA has said.

Strong consumption trends are expected to drive the growth for retail mall operators whose rental income is expected to increase by 9-10% YoY in FY2024. (Amal KS/HT Archive)(HT Archive)
Strong consumption trends are expected to drive the growth for retail mall operators whose rental income is expected to increase by 9-10% YoY in FY2024. (Amal KS/HT Archive)(HT Archive)

ICRA expects the rental income for mall operators to increase by 9-10% YoY growth in FY2024 and a mildly lower 8-9% in FY2025, driven by healthy occupancy levels, growth in trading values and rental escalations.

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Across the top six cities in India, new supply of 9-10 million square feet (msf) and around 6 msf is expected in FY2024 and FY2025, respectively. Though the net absorption was healthy in 9M FY2024, the vacancy levels rose by 100 bps to 20% as of December 2023 due to higher new supply, which has become operational recently and is yet to ramp up fully. ICRA expects the occupancy levels to sustain at 81-82% as of March 2024 (PY: 81%) and improve to 82-83% by March 2025.

Also Read: New supply of retail space expected to increase by 45% by 2028: Report

“Backed by expected growth in footfalls, increase in spend for footfall driven by premiumization and strong urban consumption, ICRA projects the trading values to improve by 14-15% in FY2024 and record 10-12% expansion in FY2025 on a high base for retail malls. However, the increase in digital penetration and continued threat from e-commerce players particularly in the retail (fashion) segment which is extending to some of the premium brands is a major challenge for the retail mall developers,” said Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA.

The credit profile of the mall operators is expected to remain stable.

Office segment – Global macroeconomic headwinds loom over office leasing

ICRA estimates the net absorption of office leasing across the top six cities in India to decline by 19-20% to around 47-48 msf in FY2024 and witness a mild growth of 4-5% in FY2025. With the influx of a huge supply of around 60-62 msf each in FY2024 and FY2025, the vacancy levels are expected to inch up to 16.0%-16.2% during FY2024 and FY2025 from 15.5% in FY2023 as supply is expected to outpace absorption, the report said.

“For the office segment, despite an increase in physical occupancy, several tenants chose to adopt a cautious approach given the global macroeconomic headwinds, resulting in slowdown in leasing activity in the technology-based sectors. This was also visible from a decline in net absorption by 17% YoY in 9M FY2024 for the top six cities. However, the demand from global capability centres (GCCs), non-IT MNCs and domestic corporates remained healthy, supporting the leasing levels,” she said.

Also Read: Office rental values increase by 7 percent year-on-year in top seven cities despite tepid leasing in H1 FY24

In December 2023, the Government of India announced a partial and floor-wise denotification of IT-SEZs, which is expected to revive their attractiveness in the medium term. Favorable demographics, a highly skilled and cost-effective talent pool, availability of high-quality office spaces at competitive rentals, would continue to drive demand for the Indian office portfolio in the medium to long-term, ICRA said.

The credit profile of ICRA’s sample set of office players is expected to remain stable.

Growing preference by occupiers for Grade A, ESG-compliant warehouses

There is a growing preference by the occupiers for Grade A, ESG-compliant warehouses with modern storage solutions. Over the last five years, the supply of grade A warehouses has grown at a healthy CAGR of 24% to 166 msf in FY2023 and is expected to be around 195 msf in FY2024, with an estimated increase of 15-16% YoY in FY2025.

Also Read: Industrial & Logistics leasing in MMR touches high of 9.9 mn sq ft: report

“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 around 30-32% in FY2025, supported by the commencement of rentals from newly added capacities and scheduled rental escalations,” said Reddy.



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