Mint Primer: Will new SEZ rules help fill up vacant offices?

Demarcated areas are expected to have better occupancy and higher rental income, in line with existing non-SEZ spaces.
Demarcated areas are expected to have better occupancy and higher rental income, in line with existing non-SEZ spaces.

Summary

  • On 6 December 2023, the Central government made amendments to the SEZ Act, permitting demarcation of parts of SEZ areas as non-SEZ areas after repayment of tax benefits availed till date.

The Centre’s move to allow partial denotification of special economic zones (SEZs) into non-SEZs in IT and IT-enabled services parks has prompted developers and real estate investment trusts (REITs) to de-notify SEZ spaces. Will this impact vacancy levels? Mint explains.

What do the new SEZ rules mean?

The Special Economic Zones Act, 2005 was introduced to drive exports by giving tax breaks to firms operating in SEZs. The tax benefits ended in 2020, but higher compliance requirements continued. As a result IT/ITeS SEZs lost their appeal and saw a gradual exit of tenants. On 6 December 2023, the Central government made amendments to the SEZ Act, permitting demarcation of parts of SEZ areas as non-SEZ areas after repayment of tax benefits availed till date. Demarcated areas are expected to have better occupancy and higher rental income, in line with existing non-SEZ spaces.

How will they impact IT SEZ vacancy levels?

Around 189 million sq ft of IT/ITeS SEZ space is available in the top seven housing markets, of which 30-35 million sq ft are vacant, says property advisor JLL India. Since 2020, vacancies across SEZs have risen every year. SEZ vacancies rose from 9.7% in December 2020 to 19.4% in September 2023. At least 15 million sq ft of SEZ space would be eligible for denotification, says JLL. Post conversion into non-SEZ space, vacancy levels will shrink as office park owners can attract new tenants for office spaces. Overall office vacancy, which is significant due to vacancies in SEZs, will also reduce gradually.

Who have applied for denotification?

Developers including DLF Ltd and the three listed office REITs—Embassy, Mindspace and Brookfield India—have applied for de-notification of SEZ spaces within their IT parks. Each has applied to convert around a mn sq ft. DLF’s rental arm, DLF Cyber City Developers, has applied for denotification of 1.1 mn sq ft and hopes to start leasing it from Mar-end.

Will it boost leasing and occupancy?

Developers and REITs can lease non-processing areas to IT firms or global capability centres not engaged in exports, which will expand their tenant base. Partial de-notification is likely to result in freeing up of significant space, increase the attractiveness for diverse occupiers and help in achieving higher occupancy levels. With most of these IT SEZs based in prime locations, the buildings will be able to achieve full leasing once the changes kick in. Hence, it should also help in reviving office rental growth.

How will they benefit REITs?

The occupancy level of the three main office REITs is around 84%, and SEZ space accounts for 64% of the operational REIT portfolio, rating agency ICRA said. However, the occupancy for REIT portfolios has been declining for the last 12 quarters due to high vacancies in SEZs post removal of tax benefits. The new rules are particularly relevant for operational IT/ITes SEZs. Most REITs, which own largely completed assets, are expecting the benefits to start showing on their financials from the first half of FY25.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App