Work dynamics have changed. Many people are grappling with both work from home and work for home. Commercial complexes are empty. Corporate occupiers would definitely rethink their office space requirement and use a mix of physical and virtual offices which may lead to reduction in space requirements of occupiers post COVID-19.
While residential real estate was already reeling from multiple pressures and COVID-19 added to the woes, it was commercial real estate that continued to do well despite general economic slowdown. This sector received huge funding from global investors like GIC, Xander, Canadian Pension Fund and Brookfield after a muted CY17 where net absorption fell to 24 million square feet (msf) owing to low supply addition vs. levels of over 30 msf seen in CY14-16 and CY18, which saw a bounce back with net absorption of 27 msf. In CY19, record completions of 44 msf have led to 42 msf of net absorption as a large portion of upcoming supply was pre-committed.
However, it is expected that near term deal in the leasing pipelines may get impacted for about 2-3 quarters. This is because two-thirds of Indian office demand has been driven by MNCs headquartered in USA and Europe over the last decade (CY10-19) especially to set up captive centres (Global In-House Captives) in technology, fintech, pharmaceuticals and consulting. The sector has seen a lot of companies talking about how they are looking at letting more employees work from home post COVID-19 also.
With so many MNCs issuing profit warnings and cash flow crunch globally, it poses a risk for office demand for the commercial sector. There could also be renegotiations of lease agreements, increasing chances of invocation of force majeure in commercial segment.
Although, there will be infrastructure challenges with regard to work from home, but this possibility cannot be ruled out. While analysts do not expect the rentals to be impacted in FY21, they could be impacted in FY22. Also, absorption levels are expected to remain in the 35-40 msf range in CY20-21 as well.
While residential real estate is also under pressure, companies with strong balance sheet will be able to survive the crisis well. DLF Ltd, India’s largest real estate developer, has exposure to both high end residential real estate market and rental malls. DLF Cyber City Developers Ltd (DCCDL) has malls of 038 msf which generate rentals of around Rs 400 crore.
Embassy Office Parks REIT, India’s first listed Real Estate Investment Trust (REIT), has a huge commercial portfolio which might not be impacted at present. However, incremental leasing is under some threat and so are the occupancy levels at two hotels.
Bengaluru-based real estate developer Prestige Estates has fair amount of exposure to commercial real estate. Company has 40 percent residential and 60 percent rental debt. Of the residential debt, 50 percent is receivables discounting loan. Operational malls generate over Rs 300 crore of annual rentals and hotels generate annualised EBITDA (earnings before interest, taxes, depreciation, and amortization) of over Rs 100 crore.
Another Bengaluru-based real estate major Brigade Enterprises receives Rs 110 crore of annual rentals from two Orion malls which are shut since mid-March 2020. Bengaluru/Chennai pre-leasing was healthy but fit-outs may be delayed.
However, Sobha Ltd, Godrej Properties, Sunteck Realty, Oberoi Realty are more dependent on the residential real estate and pressure in this segment is expected to continue.
(Source: CNBC TV18)
