The government’s decision to amend the SEZ rules and allow floor-wise denotification has brought in much needed relief to commercial space and office owners, who expect occupancy levels to rise.

In an office memorandum late on Wednesday, the government notified the changes to the regulations governing Special Economic Zones allowed denotification of an SEZ area on a floor-wise basis. Denotification is currently permitted building-wise leading to large portions of SEZs lying vacant.

The notification

The notification said, “.... the board of approval, on request of a developer of an information technology or information technology-enabled services special economic zone, may permit demarcation of a portion of the built-up area of an information technology or information technology-enabled services special economic zone as a non-processing area of the information technology or information technology-enabled services special economic zone to be called a non-processing area.”

“This marks a highly positive development for India’s office sector, already gaining strong momentum from global captive centers (GCCs),” said Aravind Maiya, Chief Executive Officer, Embassy REIT.

“...this amendment will further elevate the attractiveness of our 20 msf premium grade-A SEZ office spaces, positioning Embassy REIT on a trajectory towards achieving pre-COVID occupancy levels,” he added.

Ever since direct tax benefits were taken away for new units in SEZs from March 2020, they have become extremely unattractive, especially in the case of IT parks and with few takers for it, vacancies have been high. Currently there is around 170 million square feet of ready IT SEZ office space in the top 6 cities, of which over 30 msf is lying vacant. Another 10 msf of SEZ space is coming up that will be completed over the net two years.

Both Mindspace Office Parks REIT and Embassy REIT have a 20 per cent vacancy in their SEZs.

This is expected to change with the amended rules. The revision will infuse new office supply since the adaptability provided by floor-wise denotification offers various leasing prospects and will contribute to increased office occupancy rates in SEZ assets, according to Knight Frank India’s research head, Vivek Rathi. 

progressive reform

“This progressive reform is a significant step in the ongoing efforts to increase occupancy within IT SEZ Parks, boosting economic activity and creating more jobs,” said Mindspace REIT CEO, Ramesh Nair.

“This will help us now bring together businesses that focus on both the export and domestic market, under one roof,” Nari said, adding that it would  strengthen the appeal of its Grade A workspaces, “positioning us as the preferred choice for businesses eyeing operational consolidation.”

Brookfield REIT’s CEO Alok Aggarwal, said that the changed rules will help it meet the needs of IT, ITES companies as well as GCCs and aid in diversifying its tenant base.

“Our SEZ campuses are seeing significant leasing activities and rebound in occupancies. These amendments are going to further fasten the achieving of higher occupancies and enhance  value for all stakeholders,” he said.

Tata Realty and Infrastructure said the new policy would give the opportunity for seamless integration between SEZ and non-SEZ entities within a unified campus.

“This revised policy not only facilitates the expansion of companies’ office spaces but also extends the benefits of SEZ areas to Non-SEZ entities,” it said. It would by unlock vacant spaces in operational SEZs for the establishment of Domestic Tariff Area (DTA) units, boosting industry.

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