The stress in the balance sheets of software and IT companies and their desire to conserve cash is resulting in their giving up office space, reflected in the portfolio of office-based real estate investment trusts which are seeing higher rates of exits from this segment.
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For instance, in the case of Embassy Office Parks REIT, the area expiring in the current fiscal year has risen to 4.2 million square feet compared to 2.8 million sq ft in the previous quarter. Of the total, 2.3 million sq ft area has seen exits. Embassy REIT’s Chief Executive Officer Aravind Maiya told analysts that the exits were emanating from the IT services players. Calling the exits ‘bothersome’ Maiya said, “The exits predominantly are from that sector. A combination of continued work from home as well as the profit pressures which you are seeing in that segment. So, that’s the key reason for the increase in exits,” he said.
The REITs have been able to re-lease, but the exits are putting pressure on occupancies which are still hovering around the mid-80s levels across most portfolios. Embassy REIT has an average occupancy of 83 per cent, Mindspace REIT is 86.5 per cent while of Brookfield has a committed occupancy of 80 per per cent.
The concentration of the IT services segment in the REITs’ portfolios has gone down significantly over the years. For Embassy REIT, the IT and IT-enabled services sector is at 12 per cent of the portfolio from 25 per cent at the time of its IPO in 2019. At Mindspace REIT, IT services firms and technology companies occupy around 30 per cent of the area and for Brookfield REIT the tenant concentration of the technology companies has shrunk to around 30 per cent now from the mid-40s earlier, while the share of banking and financial services and consulting companies has risen to about 40 per cent from 32 per cent earlier with an influx of tenants from these sectors among its top occupiers.
Even as IT companies are dithering over the decisions to take up space, a definite trend that is emerged is that Global Capability Centres and the financial services sector are taking up more space and taking up the slack.
A noticeable trend that has been seen over the last year or so is that Indian start-ups, domestic corporations and those in the banking and financial services sector have been taking up space in Grade A assets.
“We are witnessing increased interest for Grade A office spaces from India Inc., across sectors of banking, pharma, manufacturing and insurance,” Ramesh Nair, CEO, of Mindspace REIT told businessline. “Our portfolio mirrors this evolving demand change, with the proportion of Indian companies growing from 16 per cent in 2021 to a significant 23 per cent now.”
“We also see demand ranging between 50,000 to 200,000 square feet gaining ground, as occupiers seek expansion spaces to accommodate the strong hiring undertaken over the last 2 years,” he pointed out.
Some domestic IT companies are also leasing space more space with more employees returning to work from the office. This is a trend in contrast to what is prevailing in the Western markets where office attendance is still low. Non-IT companies are also moving into better-quality offices.
Infosys, for instance, recently leased office space at Mindspace REIT’s business park in Airoli, RIL’s entertainment and media arm Viacom18 leased over 4 lakh square feet of office space in a building owned by Blackstone’s Nucleus Office Parks, L&T Hydrocarbon and Tata Projects leased space at Brookfield REIT’s properties in Powai and so on.