Rents Begin To Fall As Virus Disrupts India’s Office Space Boom

“My landlord asked us to stay back,” said Mankad, 47, whose 40-employee-strong WebXpress operates out of a Grade B office space in suburban Marol. He was also promised that the rent would rise 5% after a year—against the standard 10%.

Mankad, who paid Rs 2.9 lakh a month for a 2,300-square feet space, had found a smaller 1,500-sqft office for Rs 1.35 lakh a month. But after his landlord cut rent by Rs 1 lakh, he realised moving out wasn't worth the hassle. He agreed to stay.

Demand from technology firms, online retailers and startups meant India's commercial real estate market boomed when the residential sector hobbled from one setback to another. But the world’s strictest lockdown to contain the Covid-19 outbreak was tough to fend off. Offices have either opted to work remotely or move to smaller places to cut costs. Even Tata Consultancy Services Ltd., India’s largest software exporter, has said only a quarter of its employees would work out of offices by 2025. That is putting pressure on landlords when the economy isn't expected to bounce back soon. Many have agreed to cut rents rather than lose tenants.

“The emerging trend that we’re seeing in Grade A and B office spaces is landlords don’t want to let go of existing tenants,” said Sumanth Reddy, president of National Association of Realtors India. “Therefore, a lot of negotiations and discounting is taking place. 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).”

Foregoing rent, according to Reddy, is better than bringing down the rent which can affect overall yield and value of the property. “Next six months are quite crucial for India’s commercial real estate and that will give us a clear picture,” he said. “One can’t judge the market with what is happening right now.”

Before Covid-19, the average rental yield of commercial properties was anywhere between 6 and 10%, while for a residential property it was 1.5-3.5%, according to Anarock Research, a property consultancy. Anuj Puri, chairman, of Anarock Property Consultants, said that has seen a marginal dip as demand for commercial properties declined with the pandemic.

“The acceptance of the WFH (work from home) option by several companies has given office space tenants the leeway to bargain with their landlords,” Puri said. “However, this current slow demand coupled with new negotiated rentals is strictly for the short term, until Covid-19 uncertainties lift. The emergence of a vaccine—hopefully before the end of the year—will see pent-up demand for commercial properties rise once again.”

Grade B office spaces, or those that don’t have too many facilities, are being leased at 15-20% discount, said Ramprasad Padhi, a Mumbai-based real estate adviser, and founder and chief executive of Mumbai Properties Consulting Pvt. “Landlords are ready to defer rent payment up to September in some cases to retain tenants.”

Some Don’t Budge

Yet, several Grade A—or top-tier—landlords aren’t open to negotiation. Second tier, small scale and Grade B landlords may be doing so and it’s a reflection of poor quality of the property, according to an executive from a real estate developer who declined to be identified.

For large multinational firms, rentals are a small fraction of overall costs, at 3-6%, the executive quoted earlier said. They want to ensure safety and security of their staff, he said, adding rent collections have been strong in this segment. Many leases were signed in this quarter, he said, highlighting the appetite for such projects.

Padhi, however, sees pressure to continue on landlords. Rentals average Rs 250 per sq ft in Mumbai’s business district of Bandra Kurla Complex—which houses offices for the National Stock Exchange and ICICI Bank Ltd., among others, he said. “Clients are now looking at a minimum of 20% reduction,” he said, even as some landlords are quoting higher. “Many companies in BKC are planning to vacate their spaces and move to Andheri, where they will find similar spaces and save up to 60% on rent.”

Puri from Anarock said commercial property valuations in certain markets are seeing a marginal drop of up to a tenth. “However, this isn’t a market trend but is dependent on factors like property type, builder, location and amenities on offer,” he said. “Those who can hold on aren’t willing to under their properties, nor—depending on the client and all the other variables—will they be asked to.”

Embassy Office Parks REIT—India’s first real estate investment trust—said most of its tenants belong to the technology sector that’s “performing well at a global and local level during the pandemic”.

“Pre-pandemic demand was at record levels and vacancies in our micro market remain at single digit levels,” a spokesperson for the trust was quoted as saying in an emailed statement. “The already low vacancy rates in the market are being further constrained by reduced supply of new offices which will tighten further over the coming year as new office buildings are delayed”.

The trust said in the statement its tenants are “long-term in nature and have a weighted average lease expiry of approximately seven years”. “The best quality properties and institutionally held portfolios continue to be resilient given occupier quality and continue to witness robust collections, stable rents and new demand."

Bengaluru-based RMZ Corp. said most of its tenants were able to pay rents which has kept their revenue cycle intact. The developer owns office buildings in Bengaluru, Chennai, Hyderabad, Delhi-NCR, Pune and Mumbai and counts Accenture, Google Inc., HSBC Holdings Plc., Dell, Honeywell International Inc., Morgan Stanley, Reliance Industries Ltd. and Cisco Systems Inc. among tenants.

"As most of our exposure is towards technology and BFSI (banking financial services and insurance) clients, we have seen little impact on our rentals," said Thirumal Govindraj, managing director (executive board), RMZ Corp. “Definitely, these are challenging times but it’s not going to affect the overall valuation of commercial properties across the country.”

Govindraj said companies won’t give up their real estate yet over social distancing and other considerations. “Even post-pandemic, companies considering work from home may need to compare the direct cost implication of real estate OPEX (operating expense) of working from office v/s working from home on quantitative parameters.”

Still, companies have realised that work from home isn't that bad as feared. Mankhad says his employees started working remotely without any issues. But he acknowledges the importance of having an office. “The average age of my employees is 25 years,” he said. “They need a place for camaraderie and socialising.”

But that won't be a compelling reason for businesses to hold on to large office spaces when people can work from home.