Amendments in SEZ Act to benefit commercial office leasing Flexibility

BUSINESS

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. The amendments permit demarcation of part of the SEZ area into non-SEZ area[1] 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. 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%, indicates as much. Says Anand Kulkarni, Director, CRISIL Ratings, “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% against a strong ~93% 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.” Says Saina Kathawala, Associate Director, CRISIL Ratings, “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.”