India Ratings Sees A Worrying Sign For Evergreen Commercial Real Estate
A leasing sign sits in front of an office building. (Photographer: Ty Wright/Bloomberg)

India Ratings Sees A Worrying Sign For Evergreen Commercial Real Estate

When the pandemic reached Indian shores last year, stalling economic activity and prompting work-from-home, it posed a threat to an evergreen market—commercial real estate. Those fears have come true.

Occupancy at a large office portfolio-focused real estate investment trust declined to 86.8% in the quarter ended March from 92.2% a year earlier, according to India Ratings and Research Ltd. The numbers strip out the impact of acquisitions.

It declined from 87.1% in September to 81.8% as of March for another listed REIT. For other such trusts and commercial real estate companies, occupancy fell by about half a percentage point in the last four quarters.

India's commercial real estate thrived prior to the pandemic even as the housing suffered because of an overnight cash ban, a strict Real Estate Regulation Act and a credit crunch. Investors bet on demand for office space, driven by information technology firms, startups and data centres. The slowdown-proof corner, however, couldn't escape the pandemic's disruption. And decline in occupancy came even prior to a devastating second wave of the virus.

The trend sends "worrying signals” for the commercial real estate market, India Ratings said, reiterating its negative outlook on under-construction office space providers.

By portfolio size, Embassy Office Parks REIT is India’s largest, followed by Mindspace Business Parks and Brookfield's trusts. To be sure, India Ratings has not identified REITs or companies cited in its report.

Embassy Office Parks REIT remains confident, citing record hiring and new business secured by its occupiers. "100% of our 1.1m sqft FY22 new office delivery has been pre-leased and is on track for completion later this year," its spokesperson said in an emailed response. "With our occupier businesses performing strongly, and forward supply in our key markets falling by 25%, prospects look increasingly positive as we move past the pandemic."

Brigade Enterprises said the second wave of Covid-19 slowed the momentum gained from September 2020 to March 2021. "However, we notice a robust hiring trend across the IT/ITES sector which is likely to create a latent demand," Subrata KC Sharma, chief operating officer-commercial at the company, said in an emailed response. "Irrespective of a certain percentage of employees still working from home and anywhere, we predict a positive growth in office space requirements moving ahead."

BloombergQuint awaits responses to queries emailed to Mindspace Business Parks REIT, Brookfield REIT, DLF Ltd., Oberoi Realty Ltd., Phoenix Mills and Macrotech Developers Ltd.

Also read: 'Ultra-Tight' Inventory Raises Hopes For Top Shopping Malls

Private office providers rated by India Ratings have generally shown deterioration in occupancy and fresh leasing, the report said.

  • A Hyderabad-based developer building an office space with saleable area of 8.12 lakh square feet (developer’s share) saw sales declining to 9,500 square feet in FY21. That compares with 1.43 lakh sqft in FY20.

  • A Navi Mumbai-based office space provider with 2.08 million sqft of leasable area saw occupancy declining to 86% in FY21 from nearly 100% in FY20.

  • Another Hyderabad-based developer, which completed 1.25 million sqft of office space a few years ago, saw occupancy stagnating at about 76% in FY21 and was unable to find new tenants versus its expectation of fully letting out the property.

  • A Mumbai-based office space provider with 0.8 million sqft of leasable office space saw occupancy decline by around 10%, largely because it purchased additional space from a seller, who decided to move into different premises.

  • Occupancy of a Pune-based tier-1 office space provider with 0.87 million sqft of leasable space fell to 74% in FY21 from near 100% in FY20 as a large IT company vacated its premises.

Also read: Work From Home Didn’t Spur Property Boom In India’s Smaller Cities

Remote Working Blow

India Ratings listed remote working during the pandemic as one of the key factors that hurt occupancy. And its impact could be lasting.

“Negative demand created by the work-from-home culture, along with a reduction in fresh leasing activities due to a weaker economy, can easily shave 40% off the annual demand over the next few years and result in over 500 bps increase in vacancy levels over FY21-FY23,” it said.

Transition to remote working can allow companies to use hot desking — the same desk may be shared by many employees who report to work on different days, it said.

If 2.5% of the overall employees are asked to report to work on alternate days under this policy, it may cause a net 1.25% reduction in the office space required in the country, the report said. On a base of 635 million sqft of office space occupied in the top eight cities of India in FY20, it would result in a negative demand of 7.9 million sqft, it said. That's 21% of the average annual demand seen in FY19-FY20.

Hot-desking, according to India Ratings, may shave off several years’ of demand in the short run.

(Updates an earlier version with comments from Embassy Business Parks REIT Brigade Enterprises)

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