The Business Bytes
TBB BUREAU
MUMBAI, DEC 12, 2023
India’s office space leasing is expected to benefit from the recent amendments to the Special Economic Zones Act, 2005 (SEZ Act) notified by the Department of Commerce on December 6, 2023, says rating agency CRISIL.
The amendments permit demarcation of part of the SEZ area into non-SEZ area after repayment of tax benefits availed till date. Such demarcated area is expected to have better occupancy, in line with the existing non-SEZ spaces. Hence, benefits from better leasing and higher income of demarcated area will outweigh associated costs, it said.
SEZ Act was introduced to drive exports by providing tax exemptions for the companies operating in SEZs. While the sunset clause on these benefits kicked in from April 2020, higher compliance requirements continued. Further, prior to the amendment, operators could de-notify only the land parcel from SEZ to non-SEZ, which required the entire built-up area over the said land parcel to be vacated before applying for de-notification. Consequently, SEZ spaces have witnessed a gradual exit of tenants leading to a decline in occupancy.
A CRISIL Ratings analysis of office space operators with over Rs 70,000 crore debt and total grade A leasable area of 188 million square feet (msf), of which SEZs account for 47-49 per cent, indicates as much.
“The revisions will allow commercial office operators to demarcate non-SEZ areas within SEZs on a floor-wise basis, which in turn will unlock these demarcated spaces to a wider tenant base and will support faster leasing. Occupancy for SEZs stands at 81 per cent against a strong 93 per cent for the non-SEZ spaces as of September 2023. This translates into 17 msf of vacant SEZ space in our portfolio, which has higher likelihood of getting demarcated,” said Anand Kulkarni, Director, CRISIL Ratings.
To be sure, demarcation will involve proportionate repayment of tax benefits attributable to the non-SEZ area and entire repayment of tax benefits attributable to common infrastructure. Further, the operators will also be required to forego tax benefits available for operation and maintenance of common infrastructure of such SEZs.
“Our preliminary assessment indicates that the repayments associated with demarcation would be equivalent to just 3-6 months of rental income generated by a comparable non-SEZ area. Hence, the benefit, in terms of better occupancy and consequent higher rental income, will outweigh the costs,” said Saina Kathawala, Associate Director, CRISIL Ratings.
Demarcation of a non-SEZ area will not be allowed if it results in decreasing the eventual SEZ area to less than 50 per cent of the total area or less than 0.54 msf. Nevertheless, in the near term, this condition may not pose any challenge for the operators, as the vacant space presently is largely below the specified threshold.
Overall, these amendments are expected to help the office operators improve occupancy. Notwithstanding, approval timelines and pick-up in leasing demand amidst the global slowdown will bear watching.
