Most big, institutional developers recorded nearly full rental collections for the months of the lockdown.

Deloitte office in an IT park in HyderabadImage for representation/Picxy
Money IT Parks Friday, July 24, 2020 - 15:50

The lockdown imposed at the end of March pushed a huge population of India’s white-collar workforce to work from home overnight, many of whom used to work in the IT Parks in major cities like Bengaluru, Hyderabad and Chennai. Overnight, many of these have transformed into ghost towns, with a skeletal workforce working out of these parks now.

Those in the industry say that there is a lull in demand for commercial properties and work is certainly not happening at the pace that it should be. But they expect it to eventually pick up and say that the current work-from-home trend may not persist.

Anuj Puri, the Chairman of ANAROCK Property Consultants said the lull in demand is a phase, and not a “terminal event”, and expects demand to pick up in the coming quarters.

“During the initial days of the pandemic, companies leapfrogged to adapt to the new work-from-home model with widespread anticipation that office space demand will see a major decline. However, current trends suggest otherwise,” he says.

Anuj adds that companies may continue the work-from-home model for a percentage of their workforce as they will have to “de-densify” their office spaces to make sure there is adequate physical distancing.

“This essentially means that many may not actually give up on major real estate spaces, especially in high-profile and central locations. Many will want to take advantage of the negotiated rentals now and stick on to their spaces,” he adds.

Sumanth Reddy, president of National Association of Realtors-India also echoed the same and told BloombergQuint that in the high-profile commercial spaces, landlords don’t want to let go of tenants and are renegotiating and providing discounts. “In Grade A spaces especially, landlords with healthy balance sheets are deferring rents for anywhere between three to six months (on a case-to-case basis),” he told BQ.

He added that the next six months will give a clear picture, and the market cannot be judged with what is happening right now.

Demand wise, Anuj said there was a dip in demand either for commercial spaces during the lockdown period when there was no activity but has gradually been picking up again in key cities.

C Velan, the city head of Chennai operations and pan-India Head of Property Management at real estate investment management company CapitaLand India, echoed similar sentiments, and said that they are in the midst of confidence building with their clients. As of now, 22% of all employees are working out of CapitaLand’s offices in Chennai.

“However, there are certain businesses that have to operate only from the office. For eg, manufacturing offices, auto back offices. Their requirements are different, there is a need for them to go to the office, there is no way for them to work from home, he says.

The distance between people in the office is certainly going to increase by 20-30%, he says. And even if 30-40% of the total population were to continue working from home, it will be offset by the space required for social distancing, he adds, saying the worst case is that there will be a 10% effect.

This is evidenced by companies such as Google, who have been on a leasing spree, and is reportedly set to pick 2 million square feet of commercial space in Hyderabad. The trend is across many MNCs such as Accenture and Intel, according to reports.

Current trends

According to ANAROCK Property Consultants, the average rental yield for commercial properties pre-COVID was 6-10% (as opposed to 1.5-3.5% for residential). Rental yield is the amount that the property investor earns annually from rent as a percentage of the cost of the property.

“However, with demand for commercial properties reducing due to the pandemic, there has been a marginal dip in commercial rental yields in some locations. The acceptance to WFH option by several companies has given office space tenants the leeway to bargain with their landlords,” Anuj says.

According to ICICI Securities, the Indian Commercial Real Estate office market witnessed a 49% year-on-year decline in the first half of the 2020 commercial year, with net absorption at 10.5 msf. 

“While the COVID-19 induced slowdown is expected to result in a 40-50% YoY, contraction in demand and supply in CY20E, green shoots are gradually emerging. Developers in our coverage universe have reported over 90% office rental collection between March-June 2020 and have seen pickup in leasing enquiries from June 2020 onwards with few large pre-COVID deals also being honoured,” ICICI Securities said. It added that rents continue to sustain at pre-COVID levels for large, institutional landlords. 

Rental collections

However, contrary to popular belief, many IT parks have reported almost full rental collections for the lockdown months, including the Brigade Group, Embassy and Capitaland. 

During its earnings call, the Brigade Group said that their rental collections for April, May stood at over ~96%, and were expecting 97-98% for the month of June. When asked if any of them have invoked the force majeure clause, Subrata Sharma, COO, Commercial of Brigade, said, “In fact there were requests, but we actually negotiated the requests well and finally people are paying and that is why we have a healthy recovery percentage.”

Similarly, Velan said that all of their tenants have paid rent. 

Embassy Office Parks REIT, in an operational update for Q1 for the first quarter of FY21 which was entirely during the lockdown, said that it saw office rental collections at 98for April, 98% for May and 95% for June.

RMZ Corp, which has buildings in Bengaluru, Chennai, Hyderabad, Delhi-NCR, Pune and Mumbai also reportedly saw most of their tenants paying rent. 

Thirumal Govindraj, the MD of RMZ Corp told BloombergQuint that most of their exposure is towards technology and BFSI (banking financial services and insurance) clients, they had little impact on their rentals.

Way forward

According to Anuj, the current slow demand coupled with new negotiated rentals will exist only for a short-term, or till whenever uncertainties pertaining to the pandemic exist. “As soon as the vaccine is available – hopefully before the end of the year – we will see pent-up demand for commercial properties resurge,” he says. 

Velan from CapitaLand says that it is unlikely that the work from home concept will prevail, and that people will return to office post-COVID. For now, he expects the impact to be there till October.

He does, however, expect the pandemic to impact new absorption. CapitaLand expects at least 20-25% of the new leases to be deferred. Deals are still happening in cities like Chennai and Bengaluru, but nowhere near the scale they used to be in in the past. 

“There are many tenants who have been doing active negotiations in terms of finalising the spaces or deferring the decision by about six months or so. We anticipate that the absorption levels will drop heavily this year. Even construction has not been taking place much in the last four months, so the supply will also have a kind of strain. There will be a strain on both sides for the IT business,” he says. 

With inputs from Shilpa S Ranipeta

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