ICRA revises outlook for retail malls from Negative to Stable; maintains office at Stable

11 Apr 2022 , 12:54 PM

• The rental income for the mall operators in FY2023 is expected to surpass pre-covid levels supported by contractual escalations in rentals and strong rebound in trading density
• The net absorption in office segment is expected to rise to 28msf in CY2022 from 19-20 msf in CY2020-CY2021, backed by resumption of back to office plans and growth in hiring by corporates

ICRA expects the outlook of commercial real estate, both of the office segment and the retail malls segment to be stable for FY2023. The revision in the outlook for retail malls from Negative to Stable factors in the improvement in the rental incomes backed by contractual escalations in rentals and strong rebound in trading density. The demand drivers for retail malls stems from the relaxation in permitted occupancies of multiplexes and 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).

Elaborating on the outlook for the retail malls, Mr. Mathew Kurian Eranat, Vice President and Co-Group Head, ICRA says, “The footfalls are expected to reach pre-Covid levels in FY2023, however, the average spend per footfall is likely to witness some moderation when compared to FY2021-FY022. The rental income of malls in FY2023 is expected to surpass FY2020 levels by around 4-6%. The revenue is expected to grow by 45% Y-o-Y in FY2023 on a contracted base in FY2022 and support for an improvement with operating profitability of around 60-70% in FY2023 (similar to pre-Covid levels) from 45-55% levels in FY2021 at the peak of the pandemic. 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.”

The trading values in FY2023 are also expected to surpass pre-Covid levels. Trading value had been significantly impacted during FY2021 and FY2022 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 waves leading to restrictions by state and central governments.

Coming to the demand for commercial office, the net absorption[1] in this 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 pandemic, it is expected to improve in the current 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 Bangalore markets, is likely to result in an increase in overall vacancies to 18.4-19.4% by end of the year, up from 16.4% in CY2021. The rentals are expected to remain steady for Grade A properties in established micro-markets, despite potential expansion in vacancy levels.

Commenting on commercial office outlook, Mr. Eranat says, “ICRA expects a revenue growth of around 5% (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.”