Floor-wise Denotification of IT and ITeS SEZs Is a Big Boon for Commercial Owners, including REITs
Moneylife Digital Team 08 December 2023
Special economic zones (SEZ) providing a big relief to commercial office owners, the government of India (GoI) has allowed floor-wise denotification of information technology (IT) and information technology enabled services (ITeS) SEZs, fulfilling a long-standing industry demand. The sunset clause for tax incentives in SEZs came into force in March 2020 which significantly reduced the attractiveness of these properties for IT/ ITeS tenants. 
As a result, vacancies in SEZs rose, affecting the net operating incomes (NOIs) of commercial office owners. Under the rules, SEZ denotification process could be carried out only for entire buildings. However, these rules prevented owners from denotifying areas in partially vacant SEZ blocks with multiple tenants. The new amendment to the SEZ rules addresses this problem.
Under the new rules, commercial office owners are allowed to demarcate a portion of the built-up area within an SEZ unit on a floor-by-floor basis as a non-processing or non-SEZ area, subject to conditions including repayment of tax concessions attributable to the area. 
However, the rules do not allow for demarcation of a non-processing area if it results in decreasing the processing area to less than 50% of the total area or less than the area specified. The minimum built-up processing area in category A, category B and category C cities has to be 50,000 square metres (sqmt), 25,000sqmt and 15,000sqmt, respectively. Non-processing area must consist of a complete floor and a part of a floor shall not be demarcated as a non-processing area.
This development is expected to provide a fillip to the three listed office-focused real estate investment trusts (REITs): Embassy Office Parks REIT (Embassy), Mindspace Business Parks REIT (Mindspace), and Brookfield India Real Estate Trust (BIRET). All three have a large proportion of their leasable area classified as SEZs and are, therefore, suffering from low committed occupancies. In response to the development, the unit prices of Embassy, Mindspace, and BIRET increased 7.37%, 0.84% and 3.93%, respectively, on 7 December 2023.
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