As businesses drag, DLF sees rise in vacant office space

Vacant space in the office portfolio of DLF, the country’s biggest real estate developer, has increased nearly threefold to 3.7 million sq ft in the January-March quarter from 1.3 million sq ft a year earlier, signalling the impact of the pandemic on the commercial real estate business.

With more than 10 million sq ft of operational space, DLF Cyber City in Gurgaon, which houses some of the biggest IT and Fortune 500 companies, has been impacted the most with vacancy levels going up from about 1% to 15% in a year.

An analysis of the investor presentations of the company for the last eight quarters revealed that at the end of March 2020, Cyber City had about 140,000 sq ft vacant. That increased to 300,000 sq ft in June last year, 500,000 sq ft in September, 1 million sq ft in December and 1.5 million sq ft in March this year, reflecting a trend of tenants leaving the property.

Of the total, 800,000 sq ft have been vacant at the Silokhera Special Economic Zone in Gurgaon for the past few years due to a legal issue. Silokhera’s share in the total vacant space of the company was over 50%, but it has now reduced to less than 25% as the share of Cyber City increased substantially.

The company operates 30.3 million sq ft of office space in Gurgaon, Chennai, Hyderabad, Kolkata and Chandigarh, and Cyber City constituted one third of it.

DLF Cyber City Developers Ltd (DCCDL), under which the company operates its rental assets, expects office space leasing to reach the pre-Covid level in fiscal 2023, managing director Sriram Khattar of the rental arm told investors on an earning call on June 12.

On Thursday, Khattar said the dip in demand was temporary and driven by increasing digitisation.

"This pandemic has done two good things — firstly, it has brought in a higher level of digitisation, resulting in cost-effective IT solutions from remote and cheaper locations. It has also proven India’s strong capability of its IT backbone and quality of IT services delivery across the globe and secondly, it has helped everyone, including developers, tighten their costs, and some of those cost savings would be sustainable going forward, thereby offsetting the current blip to a great extent,” he told ET.

Industry experts said the increase in vacancy at the country's most prime office building was a cause of concern and that this was among the highest since Cyber City became operational.

“Many companies have moved to Noida because of low rental and that is why occupancy at many properties in Gurgaon is going down. But there has been a significant number of fresh leases also,” said an executive at an international property consultancy firm.

While the vacant space increased, office rental of DCCDL rose 10% in fiscal 2021 from the year before, driven by the completion of Cyber Park, Chennai Block 11 and renewals.

The real estate company newly leased 4.3 million sq ft in FY21.

Consolidated revenue of DCCDL at Rs 4,385 crore for FY21 was lower than in FY20, primarily due to the impact on its retail business.

DLF said demand in the April-June quarter was expected to remain muted due to the pandemic resurgence and consequent lockdown restrictions.

According to ICRA, the commercial real estate sector would continue to face significant pressure in the near term due to the impact of the Covid-19 pandemic on both the office and retail leasing segments.

The overall office market in India witnessed a 33% sequential net decrease in absorption in the January-March quarter with 5.53 million sq ft leased during the period, according to the JLL Office Market Update.