Commercial real estate was once notable for big ticket deals like the one in September last year, when Blackstone Group and partners snapped up a business park owned by Cafe Coffee Day for around Rs 2800 Crore. At present, however, transactions of that size have become a thing of the past with a troubled financial system, and the ensuing coronavirus-related lockdowns. While there are rare instances of smaller deals in prime locations, the future indicates office space rentals holding good with defaults to come from retail tenants.
Jitu Virwani, Chairman of Embassy Group, a listed REIT and the second largest landlord after DLF says that for the month of April, he saw rent collections at 96 per cent. "Some retail tenants have been hit hard but we see the future of commercial realty as OK once the markets open given that most back-offices will be calling for spaces that are larger for their employees," he said. He refers to companies such as JP Morgan and Goldman Sachs whose international protocols for safety mandate more space for each individual employee. "Retailers will need a lot assistance," he said.
Officials with Blackstone Group, the largest commercial landlord in India, said that it was too early to say anything.
Other leading landlords claim firm footing. Irfan Razack, chairman of the Prestige Group, which operates malls and hotels, said on a webinar call that "92 per cent of my office tenants have paid the rent for April."
He went on to add that vacancies in A-grade properties were limited with occupancy as high as 95 per cent. "New inventory will take at lest five years to come into the market," he said. According to Anarock Research, as of end 2019, the average occupancy of Grade A office space was close to 86%.
"It's key to note that in a regional business like real estate there's hardly a surplus of top-notch office space that is lying empty in Mumbai," said Gulam Zia, executive director with property consultancy Knight Frank India.
The other factor supporting rentals is that most of the tenants are are from the IT sector, which is an essential service and offices are using large data rooms and servers even if employees are working from home. "That said, demand is obviously not accelerating, but you won't see buildings emptying by the dozen either," says Kamal Khetan, Chairman of Sunteck. "In the next 6 months people will certainly go to malls, and hotels and retail rentals may or not come down but they won't spike as highly as they did before," he added.
The head of an international private equity firm said that at a macro level while interest rates decline, real estate valuations go up even if rentals stay flat or decline marginally. He went on to add, "Imagine an IT employee who earns between Rs 10 lakhs and Rs 20 lakhs a year, and he is suddenly told to go home and work from there. His access to a cafe, computer telephones, printers, high-speed broadband is all then on his own cost and you could start to see a shift in productivity not to mention an inherent security risk. How do you know that the employee is not working for two other call-centres as well from home?"
In his view, co-working spaces will take the biggest hit because startup leaders will not be able to afford more seats in order to crate social distancing, and will likely be already struggling with small balance sheets and revenue that is yet to grow. Virwani, however, says that co-working offices with glasswork box type cubicles are actually cleaner and safer and can be locked up.
Seven out of 10 RFPs of approximately a million and and a half square feet across the nation have been put on hold due to the epidemic, says Samir Jasuja Founder of PropEquity, pointing out retail customers in office spaces who are not paying their rentals across the country. "Prices won't go up for rentals," he said.
Despite that, the deeper impact on the sector will be linked to economic impact on markets such as the US, because US companies are major office space consumers in India. "Almost 45%," said Anuj Puri, Chairman of Anarock. "On the other hand, there is also a possibility that office space demand may not really see major decline as rents are not calibrated on the basis of how many employees use it, but on the space occupied in a certain location," he said.
The bigger worry is how to start construction when rules change. "You need to now leave your steel untouched for at least 14 days according to new guidelines," Virwani said. "Expect delays for at least six months for new work," he added. Razack, meanwhile, agreed, adding construction wouldn't start before Diwali.