Virus Threatens A Booming Corner Of India’s Bruised Property Market

As employees logged in remotely during the lockdowns to contain the virus, businesses globally have realised that working from home isn’t as bad as feared. The need to cut costs as the economy takes time to recover will only make many consider it as a permanent option.

Twitter Inc. has already told its employees that they can work from home forever. In India, software services providers, one the biggest consumers of office space, and financial services firms are also considering remote work for at least some employees.

That may be a worrying sign for the commercial real estate sector even though it defied the housing slowdown. Demand for space from companies and retailers continued to grow when home sales struggled to recover from multiple setbacks, and private equity investors piled in.

Pankaj Kapoor, managing director at property consultant Liases Foras, said the real estate market, with a contribution of 5.5 percent of India’s employment, is dependent on the global banking, financial services and insurance and IT jobs market for office space occupancy and residential sales. Any fall in demand will impact occupancy and rentals.

Developers, however, don’t see it as a real threat.

Clients have explored work from home in the past, and it has only been a temporary phenomenon, said Vinod Rohira, managing director and chief executive officer, commercial business, at K Raheja Corp, that counts Accenture Plc., L&T Infotech Ltd. and Cognizant among tenants. A small percentage of employees may work from home, he said, adding offices may move back to staggered timings and multiple shifts.

Most of the workforce consists of millennials, he said. “Most have left home and moved to the city to pursue a career and often stay in small shared spaces. Their place of work provides for a lot more than just professional growth, ranking high on intangibles like camaraderie, a social life, and mentorship.”

According to Rohan Sharma, head of research, Cushman and Wakefield, work from home in India’s context doesn’t look like a long-term solution, given the limited space constraints in homes. “Especially with two professionals or more, joint families, network connectivity and outage issues.”

For Ashutosh Limaye, director and head, consulting at Anarock Property Consultants, working from home has multiple benefits and it’s as exciting as the co-working market. But, according to him, it won’t work for every type of company.

Big firms have functions that require a high-level of centralised supervision as well as data security which are only available in a formal office setting, Limaye said. “As is becoming evident in this trial by fire, video conferencing technologies have very distinct limitations, too.”

India’s information technology companies, however, managed these problems well during the work from home phase.

For Tata Consultancy Services Ltd., up to 90 percent of its employees were logging in remotely as the company streamlined the process after initial hiccups. Rajesh Gopinath, CEO and managing director at India’s largest software services provider, indicated that the 20-year-old operating model will change. The answer to the question if work from home is here to stay, he told BloombergQuint earlier, is “irrevocably yes”.

Abid Neemuchwala, chief executive officer at Wipro Ltd., said after fourth-quarter earnings that work from home will define a new normal for a lot of industries and will create new opportunities to do more work globally.

Financial services companies including banks remained operational with either staff operating from home or with reduced strength at branches. ICICI Securities Ltd., India’s largest listed brokerage, told Bloomberg that it’s looking at jobs that can be done from home.

Pressure On Rentals

If demand for office space falls, it will impact occupancy. Liases Foras estimates office space vacancy to rise from 12 percent to 21 percent by June, adding to pressure on rentals. Multiplexes and retailers are already asking mall owners to negotiate terms.

This will be a period of intense negotiation and figuring out a cost-optimal real estate portfolio strategy, according to Sharma of Cushman and Wakefield. “There will be some rationalisation of rental yield expectations given the current scenario.”

Developers denied any possibility of rentals coming down.

Rohira of K Raheja Corp said average rents for technology spaces in most markets are well below a dollar a square foot and that’s not being looked at to negotiate or reduce. “In fact, clients will opt to pay a premium for a place where there is intensive protocol and safety. In the short term, you cannot expect people to disrupt workspaces.”

Bengaluru-based RMZ Corp, according to Arshdeep Sethi, managing director, executive board, the company too has had no talks on renegotiating rentals. The developer owns office buildings in Bengaluru, Chennai, Hyderabad, Delhi-National Capital Region, Pune and Mumbai and counts Accenture, Google, HSBC, Dell, Honeywell, Morgan Stanley, Reliance and CISCO among tenants.

A spokesperson from Embassy Office Parks REIT said in an emailed statement that their tenants have been able to operate critical business infrastructure without interruption and comply with the terms of their leases. “Given our marquee tenant roster, we have minimal impact on business.”

Billionaire Ajay Piramal, chairman at Piramal Enterprise Ltd., however, admits that work from home is going to be a challenge for the commercial real estate sector. But he sees an upside there.

If businesses work from home, then residential demand will go up, said the head of the financial services-to real estate group. “We have realised in this period that for you to be effective to work from home, you need to have some space of your own.”