What is the current scenario of commercial real estate in India? When is the market going to bounce back?
Work from home seems to be the trend in the short run, given the Pandemic's uncertainty and health risk. While employee morale may look good right now, the same cannot be expected in the long run. Humans are social beings, and once they go out, see people around, work together, all this will result in higher levels of job satisfaction and productivity. Work from home arrangements remains a crisis response for many businesses, looking to get back to the office in the medium and long terms. As a result, commercial real estate can expect a slow year or so, but there is a ray of hope in the long term. Given offices are not occupied at full capacity, demand for physical offices to accommodate immediate growth/expansion is limited and on hold. However, once the situation normalizes, office space absorption will see a good recovery. We expect a significant recovery by Q1 of next year.
How can an environment be created so that employees can be back-to-office without the fear of Covid-19?
Organizations are doubling down on hygiene for employee safety, in turn driving a surge in business for on-demand service providers and facility management companies. Companies planning to operate from office have created an alternate attendance method to implement social distancing and taking measures for inside office working guidelines, like mandatory masks, change of seating plans to ensure social distancing, sanitization and temperature checks at entry and exit and face recognition system for attendance monitoring.
More frequent deep-cleaning, sanitization, fumigation, and disinfection cycles have been planned as a slip-up cost could be enormous for firms. While this means a jump in housekeeping costs of 30-60%, according to experts, companies say they will not be making any compromises.
What are the emerging trends in commercial real estate? Is the office layout being re-done with technology getting prominence due to pandemic?
The following trends are observed with major focus on inclusion of technology to minimise touch points at every step of the entire cycle for workspaces:
Rapid Technology Adaptation - While WFH gains momentum and companies evaluate its viability in the Indian context, organizations are putting in their best to adapt to new technologies to ensure business continuity. Data Security – IT Security trainings for employees are getting introduced and many organizations have introduced more authentication processes to avoid any system hacks. De-Densification & Flexibility - The pandemic has compelled organizations to revisit their workspace planning process and provide more space to employees, evaluation of managed office spaces to bring in agility to the portfolio for future contingencies. Re-Gearing Of Leases - Occupiers are looking at potential opportunities to re-negotiate commercial and operational terms in order to bring cost efficiency. Early Renewals - Landlords are willing to discuss early renewals for leases in lieu of extended lock-ins to retain top clientele
How is the rental and leasing market shaping up?
During H1 2020, gross leasing declined 36% YOY to 16.7 million sq feet (1.6 million sq meters) across the seven major cities* in India. We note that occupiers have been delaying leasing decisions on two accounts first, the majority of the organisations continue to work from home due to spread of COVID-19 infections and occupiers in sectors such as hospitality and small and medium enterprises (SMSEs) who have been financially impacted, and are reconsidering their decisions.
Bengaluru led the leasing activity with 32% share in total gross leasing in H1 2020, followed by Delhi-NCR with a share of 16%. During H1 2020, demand from information technology and business process management (IT-BPM) and technology companies accounted for about 52% of the total leasing, up from 36% share in H1 2019. Interestingly, despite an overall decline in gross leasing, leasing by IT-BPM and technology companies rose by about 1.2% YoY. We expect IT-BPM sector to continue its leasing streak, while expecting flexible workspace operators to bring down their expansion. We note return of enquiries by global firms in cities such as Bengaluru, Hyderabad, and Delhi-NCR, infusing optimism in the sector.
Which are the cities that are registering maximum footfall in office-space in this pandemic period? Why?
In most other countries and territories, economies were turning down in Q2 from Q1. Certain office markets nevertheless held up surprisingly well. Chief of these were the seven major Indian cities, where gross leasing fell by only 36% over H1 2020 as a whole despite a lengthy national lockdown. Among the three cities included in our aggregation, Bengaluru was the star of the show, with gross absorption of 5.4 mn Sq. ft. in H1. Delhi-NCR was also firm, although Mumbai slowed down noticeably.
Will it be an end for co-working space or will in emerge stronger? Which are the sub-sectors that are expected to perform better?
The co-working sector has shown remarkable growth in recent years, many MNCs have embraced the concept to bring in more flexibility within their portfolios. We certainly believe that the concept is here to stay as it evolves with the changing times. Most of the co-Working/Managed office services providers worked on principles of Collaboration and these spaces are designed to promote more social interactions than distancing. Co- Working sector is hit due to the ongoing crisis and many players today are revisiting their business models to come up with innovative solutions. Currently, there are more than 350 organised & unorganized co-working service providers in India. The current situation shall act as a catalyst in the process of consolidation within the Indian co-working space ecosystem, which has long been on the cards. Enterprise models offered by co-working spaces shall act as a strong alternative to traditional lease models for organisations looking at short-term contracts & diversifying their portfolio in different micro-markets as opposed to the ongoing trend of consolidation.
Also, the co-working business model shall help corporates to avoid the upfront initial capital investment required in setting up a facility by amortizing the capital costs over a period. The above reasons instil our faith in the long-term attractiveness of the model.
What is your take on warehousing & logistic and data centres? How will they shape up in future?
India stands at the threshold of a new wave of industrial growth, as companies look to adopt technology and automation in their manufacturing and engineering set-ups, moving towards Industry 4.0 - the transformation in manufacturing enabled by technology. Further to the ‘Make in India’ programme launched in 2015, the government has become more vocal about making India an attractive manufacturing destination for global and domestic companies through its initiative ‘Atmanirbhar Bharat’ launched during the COVID-19 pandemic in 2020. The industrial activity has gradually begun to improve, after the easing of the COVID-19 induced lockdown restrictions. This is an opportune time for industry players to revive focus on the manufacturing sector.
We recommend manufacturers utilize government incentives to build suitable manufacturing facilities. We suggest electronics and pharmaceuticals companies focus on Bengaluru and Hyderabad, while the automotive segment should focus on Pune, NCR and Chennai. Leveraging accelerated adoption of e-commerce by consumers, we recommend developers and landlords work closely with professional real estate consultants to upgrade their facilities while securing built-to-suit and pre-commitments from e-commerce companies.
We recommend government agencies aggregate large contiguous land parcels at suitable manufacturing and logistics locations, which are free from encumbrances. This land can be made available to the private sector at a fair market value. The current pandemic situation is leading to increased demand for data services. Closure of schools, working from home policies and social distancing have placed greater demand on web-based platforms such as online meetings and classes. The data centre market has a strong outlook and is likely to attract more investors looking for an upside. Data centre rent will continue to go up and its yield will be more attractive compared to other sectors.
More interestingly, in near future, data demand from the introduction of 5G coverage in India will grow the underlying need for storing and processing data exponentially. As such, data centre and cloud services operators are actively looking for more space in India.
How can the government step-in to propel the sector?
Given the growth potential of our economy, occupiers will continue to be bullish on long term Real Portfolio growth in India and we don’t foresee any major impact on long-term commitments. We have witnessed hiring taking place in some sectors even when occupiers continue to work from home. Once the Pandemic settles, Office market will be the first one to recover. Commercial real estate has been the blue-eyed boy for the Indian real estate sector through-out India’s story of economic growth. Net absorption of Grade A office spaces has witnessed an average increase of 10% year-on-year and peaked in 2019. Given, its high per annum yield & insulation from market volatility in long run, it has been favoured highly by institutional investors. Government policy on moratorium to all existing individual and corporate term loan borrowers has certainly helped developers to manage their cashflow well during these tough period. Any further relief to the sector will help developers to pass on some benefits to the occupiers who are also facing cashflow crunch.
How can an environment be created so that investment in commercial real estate is back to the pre-Covid-19 level?
In last 4 years, the Indian real estate sector has attracted USD 14 billion worth of investments. Real estate may not yield immediate results, but by being less unstable than the market-driven investments, it is certainly a safer bet even in the current situation. A commercial property gives an average rental yield of 6%-10%, as opposed to the rental yield of 1.5% – 3.5% from a residential property. The same holds for capital appreciation in the current market scenario. We foresee continuity in private equity investment in Indian real estate over the long term, with a robust growth as compared to other major economies despite the Covid-19 outbreak. The appetite for sustainable commercial real estate is expected to strengthen, especially for those looking at more stable rental revenues. Traction from private equity capital, especially in core assets, will strengthen further due to volatility in other segments. We also expect real estate investment trusts (REIT) to continue to gain traction, even though there will be greater scrutiny on quality of assets, sustainability elements and portfolio resilience. Big Private Equity funds remain bullish on India growth story and we might see some large size PE deals happening soon in Bangalore including top leading real estate developers.
