High-Grade Commercial Properties boost Credit Profiles of Realty Firms

Average rentals of Grade A commercial properties have risen 10% in the last three years, boosting credit profiles of realty players, Crisil said. Crisil’s analysis of high-grade commercial and retail properties, spanning over 23 million sft, shows a steady increase in demand with rising rentals and low vacancy rates. Consequently, the asset value of 15 large deals executed in the sector in the last three years has touched Rs 22,000 crore. “Typically, well managed, high-quality properties with average tenancy of around years and stable occupancy of nearly 90 per cent provide good cash-flow visibility,” Sachin Gupta – Senior Director, Crisil Ratings, said.
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, Crisil added. These specific characteristics include tenant mix and vacancy risk as well as a deep dive into the quality of management of the property developer or 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, it added.