The delay in finalising amendments in the Special Economic Zone (SEZ) regulations by the government has led to uncertainty for office owners. They are trying to deal with rising vacancies in SEZ zones due to upcoming expiries in leases and getting more tenants into non-SEZ spaces.
The challenge is that current regulations only permit full building denotification and not a floor-wise denotification. Office owners are finding it difficult to manage this partial denotification with the result that large chunks are lying vacant. The denotification process also takes a few months, adding to the problem.
The government introduced the Development of Enterprise and Service Hubs (DESH) bill that seeks to remove restrictions around businesses that were allowed inside SEZs, but currently, there is no movement on it. The indications are that instead of a comprehensive DESH Bill, the government may just make some amendments to the SEZ Act.
According to industry officials, the Ministry of Commerce is in the final stage of amending the SEZ Act and one of the changes will be extending building-wise denotification to floor-wise denotification and freeing up space for them to lease. The industry is expecting difficulties over the next several months and subdued leasing until the amendments are brought into place.
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Of the total 180 million square feet of SEZ space in the industry, about 30 msf is lying vacant with no takers for it due to the delay on the part of the government contributing to uncertainty. According to Cushman & Wakefield data last year there were about 260 SEZs operational in the country and over 300 to be notified.
How providers are faring
DLF, a big office provider in the Delhi and National Region, has a vacancy of 15 per cent in the SEZ area while in the non-SEZ area, it is around 6 per cent. Slightly over 30 per cent of its office portfolio is in SEZ zones with about a fifth of total rentals coming from it.
Embassy Office Parks REIT, whose portfolio is split equally between SEZs and non-SEZs, has a chunk of expiries, just over 3 million square of feet, coming up this year in the SEZ zones. Officials indicated that due to the uncertainty over the regulations, there is very little interest in this space. What they are able to market is the non-SEZ portion of the expiries.
Global capability centres or GCCs, which are in discussions to lease office space in India and can pay higher rent, are also avoiding SEZ spaces because they require ease of operations. The floor-by-floor denotification is critical for the industry because if a large amount of space becomes vacant in a building, current regulations do not allow partial denotification and that space cannot be leased out.
Mindspace Business Parks REIT has five IT parks that are in the SEZ zone and make up about 55 per cent of its portfolio. It has about 2.3 msf of space vacant in the SEZ space and the trust is denotifying building by building, a painstaking process, to add to the non-SEZ supply.
Office leasing, a good demand for which comes from large MNCs (especially from the technology giants), has become subdued in recent months due to the slowdown in the US and Europe, which are major occupiers of Grade A office space in India. While there is interest and conversations are still on, there is hesitancy over concluding deals and signing on the dotted line.
The delay over the SEZ regulations is compounding the problem.