Decoding Real Estate, as Tenant, Owner, Investor

One good thing out of the pandemic crisis has been the letting go of the physical monitoring and keeping tabs on who is leaving office when that is such a feature of work culture in India. So many people mistake long hours in the office premises for hard work. With work from home successful in many job functions, there is a rethink of who needs to come into work and where they need to be located. Just this one decision is going to change the way we think about real estate—as tenants, landlords and investors. The outlook for both residential and commercial properties is bleak. Pick any report and the deepening of the real estate slump is the prognosis. A Knight Frank report shows the stakeholder (read developer, builder and broker) confidence at an all-time low, both for the present and the future, with scores in the 30s. A score of 50 and less points to “pessimism”. There are already reports of those best able to bargain pushing for lower rents. A newspaper report says that banks are in the process of renegotiating their rent contracts and may stand to gain 10-20% of their rental outgo.

As an individual tenant, our bargaining power is much less than large firms, especially banks, but nothing prevents us from negotiating on many fronts. For those single “migrants” living on rent in the expensive metros of Delhi and Mumbai, who have the option to go back to their home towns and work from home, it is a good idea to suggest it to your office HR or team lead. Many such people had headed back home ahead of the lockdown and have seen no drop in productivity. Ask for a one-year facility to work from your home towns. Most work places will agree if indeed your work can be done from a remote location. Remember that offices too are thinking of downsizing spaces—why pay rent for or maintain 30,000 square feet when just a third of that would do. Once you have this, you can let go of the place you rent. The collateral damage could be in the landlord not letting go of the security. Whatever the exact situation, remember to do the math—what money working from your old bedroom in Indore with home cooking as a priceless perk will release and what the cost-benefit of paying that deposit to release yourself from the rental contract actually means in terms of money. This, typically, will work for the single under-30s who can uproot themselves and sink back to the familiar routines of home. For those with families and kids in school, there is no “going back home”—home is the city now. You can begin to look for other places to rent. Usually, landlords get stuck to the rent they are charging and are unwilling to reduce. You may get more space, better amenities in the same locality for lower rent. Spread the word and maybe your own landlord will see the logic of lowering the rent.

Landlords will need to look beyond the normal catchment for tenants. They may need to up the amenities, will have to reduce rents—specially in commercial spaces. That 10% annual escalation clause is going to be part of an earlier, happier time. Let it go. This is a buyer’s and renter’s market. The prospects for office rentals and other commercial real estate too are poor. There is an increasing realization that just flattening the curve was the necessary condition to fighting the virus, not the sufficient. In fact, other than a vaccine that may take years to come (no anti-vaxxers, you are not going to win this one), the new mantra is “learning to live with the virus”. Previous pandemics show that the virus usually mutates and never really goes away. This means more online work, shopping and entertainment for some years ahead. Also, with incomes under pressure, the capacity to pay higher rentals is under pressure. So bleak days ahead. If you like your tenant and they are doing good to your property, allow lower rents yourself to retain them. We dislike moving, especially when there is a family, so use that to encourage tenants to stay where they are.

Investors into real estate. What can I say? This column and the Mint personal finance pages have for the last few years been saying that the slump in prices is not going away anytime soon. I have earlier used the metric of looking at rental yields to see if the deal is even worth the brochure you hold in your hand. Divide total net annual rent by the value of the property and see what number you get. Net annual rent is the rent net of society fees, property taxes and income tax you pay on the rent. My hunch is that this number in most locations in the large metros is still 1.5-2%. You are better off on a sovereign gold bond than this deal that comes with all the clunkiness that only real estate can have. The pandemic has ensured that the nuclear winter for real estate has just got far longer.

(Source: Livemint)