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The delay in replacing the Special Economic Zones (SEZ) Act 2005 with the Development (Enterprise and Services) Hubs Bill, 2022, is having a negative impact on the rental collection of large office parks. Industry experts have pointed out that corporates are hesitant to lease space at SEZ parks due to the uncertainty surrounding the SEZ Act. Developers were optimistic that the new bill would help reduce vacancies by allowing them to de-notify vacant spaces and lease them to domestic businesses.
During the Q4 FY23 earning calls, Sriram Khattar, the managing director of rental business at DLF, acknowledged the concerns surrounding SEZs. He mentioned that there might be some short-term pain in the market for the next few months, but he doesn't expect it to last long. DLF, a prominent real estate developer, has experienced a 15% vacancy rate in its SEZ portfolio, while the non-SEZ portfolio has seen a drop in vacancies to just 6%.
According to a report by ICICI Securities, since January 2023, global macro headwinds such as rising interest rates and a slowdown in hiring by tech multinational corporations have contributed to a decline in large leasing decisions. Additionally, the delayed implementation of the DESH Bill, along with the issuance of fresh exit notices by some major tenants during the January-March 2023 period, has further dampened the market sentiment. As a result, office Real Estate Investment Trust (REIT) managers like Embassy, Mindspace, and Brookfield have refrained from providing distribution guidance for FY24 due to the uncertain near-term outlook. However, the report suggests that these factors driving the underperformance of REITs may reverse from FY25.
One of the key reasons for this underperformance is the conversion of SEZs to non-SEZ spaces. The provisions of the DESH Bill aim to attract a new set of tenants to SEZs. This bill is crucial for occupiers in the SEZ zones as they seek clarity regarding expiring leases. At the same time, developers may have to address rising vacancies if there are further delays. Anshuman Magazine, CEO of CBRE India, South-East Asia, Middle East & Africa, emphasized the importance of clarity in the bill's movement and specific clauses. Such clarity would enable occupiers to plan future leases while allowing developers to strategize their course of action to sustain occupancies.
In summary, the delay in replacing the SEZ Act with the DESH Bill has created uncertainty in the market and impacted the rental collection of large office parks. The hesitation among corporates to lease space at SEZ parks, combined with global macro headwinds and the delayed bill implementation, has contributed to a slowdown in large leasing decisions. However, there is optimism that once the DESH Bill is enacted and provides clarity, occupiers and developers will be able to plan for the future and reverse the current underperformance in the market.
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