High-Grade Commercial Realty’s Improving Demand Boosts Credit Profiles

CRISIL’s analysis of high-grade commercial and retail properties that it rates, spanning over 23 million square feet, shows a steady increase in demand in the recent past, with rising rentals and low vacancy rates at ~5-10% over the last 3 years. Average rentals have risen 10% in the past 3 years for Grade ‘A’ properties rated by CRISIL. Consequently, the asset value of 15 large deals executed in the sector in the past 2-3 years has touched Rs. 22,000 crore.

The established track record of the sector, a greater presence of global private equity funds and improved quality of management gives CRISIL higher confidence regarding the stability of this sectors’ cash flows. CRISIL has accordingly fine-tuned its criteria to reflect the same.

Sachin Gupta – Senior Director, CRISIL Ratings, said, “Typically, well managed, high-quality properties with average tenancy of ~3 years and stable occupancy of ~90% provide good cash-flow visibility.” The credit profile is further supported by the low cost of debt funding available for these high-quality realty assets. This is reflected in the reducing spreads for loans to these assets by 75-100 basis points over the bank benchmark rates.

Such a milieu would continue to draw investors to this realty segment over the medium term, especially private equity funds and property managers. Apart from better management of assets, these players bring in improved financial discipline with structured escrow accounts and reduced cash-flow leakages.

As part of its process, CRISIL reviews its criteria for ratings on a periodic basis. CRISIL’s rating experience over the last few years in the commercial real estate space indicates that high-quality assets and proactive asset managers have demonstrated a long track record of attracting and retaining marquee tenants. In addition, they also demonstrate strong pricing power and ability to attract capital while maintaining financial discipline.

Says Somasekhar Vemuri – Senior Director, CRISIL Ratings, “CRISIL has fine-tuned its criteria for rating the debt of operational commercial real estate assets where specific nuances of property have been given greater emphasis, besides cash flow coverage, to arrive at the rating.”

These specific characteristics include tenant mix and vacancy risk as well as a deep dive into the quality of management of the property developer/manager.

The application of revised criteria on CRISIL’s operational commercial real estate portfolio will result in a positive bias on the credit rating of some of these assets. CRISIL will evaluate its commercial real estate portfolio based on the revised criteria and update its ratings on these assets shortly.

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