For five years till 2019, India’s commercial property (office) market outshone all other segments in the real estate universe. However, with the Covid-19 contagion disrupting business activity in the country, concerns are rife over its impact on demand, and lease rentals of office space.
Indeed, near-term office lease rentals are likely to stay intact as contracts with clients tend to be for a fixed period. There could, however, be risks during renewals.
“Our channel checks suggest that pre-leased upcoming supply and near-term deals in the leasing pipeline may get deferred by one or two quarters depending on how the COVID-19 situation evolves. Any economic slowdown in USA and Europe over the medium term is a bigger risk to Indian office demand in CY21-22,” said ICICI Direct Research in a report.
About two-thirds of India office space demand is driven by multinational corporations (MNCs) based in the US and Europe. Also, global travel restrictions and slowing domestic business travel may stymie deals.
Anuj Puri, chairman of Anarock Property Consultants Pvt. Ltd, said: “Many MNCs and information technology companies may begin to appreciate the underlying benefits of work-from-home. If it turns out to be productive, they may even rethink their office leasing activity in the future.”
In addition, sluggish economic growth could affect private equity deals and inflows into the real estate sector, at least for some time. To be sure, such fears are justified. Covid-19 struck at a time when demand-supply dynamics were not very favourable for developers (see chart).
A Kotak Institutional Equities report said supply of office space surged 390% in the December quarter, even as absorption (demand) fell 38%. Supply in 2019 had jumped 181%, while demand had risen by a mere 3%.
Not surprisingly, inventory and vacancy levels have inched up. This could cap the rise in lease rentals. “Investors may be concerned with potential re-negotiation of contracts, though we believe larger institutions will sustain the current period of economic uncertainty,” said the Kotak report.
Any widening of demand-supply could dampen investor sentiment that is already weak. The Nifty Realty index has fallen 28% since January. Shares of large listed developers such as DLF Ltd, Phoenix Mills Ltd, Embassy Office Parks REIT and Brigade Enterprises Ltd have shed 20-30%.
Initial concerns were on residential sales. However, the uncertain outlook in office space, which was so far pulling up revenue and profits for most developers, is now an additional overhang at least till fears of Covid-19 ebb.
(Source: Livemint)
