Commercial real estate has been notable for big-ticket deals. Like in September, when Blackstone Group and partners snapped up a business park owned by Café Coffee Day for around Rs 2,800 crore. But transactions that size are vanishing due to a troubled financial system, and epidemic-related lockdowns.
While there are rare instances of smaller deals happening in prime locations, the future indicates office space rentals holding good with defaults to come from retail tenants.
Since March 25, realty advisory and brokerage firm Anarock has signed in principle agreements for sales of over Rs 250 crore of real estate. Of this, just a little over 12 per cent accounted for commercial property.
Jitu Virwani, chairman of Embassy Group, a listed REIT and the largest landlord after DLF in the country, said that for 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 okay once the markets open up, given that most back-offices will be needing spaces that are larger for their employees." He referred to companies such as JP Morgan and Goldman Sachs, whose international protocols for safety mandate more space for each employee. "Retailers will need a lot assistance."
Officials with Blackstone, the largest commercial landlord in India, said it was too early for a view.
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Other leading landlords claim firm footing. Irfan Razack, chairman of the Prestige Group that operates malls and hotels, said on a webinar call that "92 per cent of office tenants have paid rent for April".
He said vacancies for A-grade properties were limited, with occupancy as high as 95 per cent. "New inventory will take at least five years to come into the market," he said. According to Anarock, as of end 2019, average occupancy of A-grade office space was close to 86 per cent.
Gulam Zia, executive director with property consultant Knight Frank India, said: "In a regional business like real estate, there's hardly a surplus of top-notch office space that is lying empty in Mumbai."
The other factor supporting rentals is that a majority of the tenants are information technology (IT) firms and they are using large data rooms and servers even if employees are working from home. That being said, demand is obviously not accelerating. "But you won't see buildings emptying by the dozens either," Kamal Khetan, chairman of Sunteck Realty, said. "In the next six months, people will certainly go to malls and hotels. Retail rentals may or not come down, but they won't spike as highly as they did before."
A head of a international private equity firm said that at a macro-level, while interest rates go down, real estate valuations go up even if rentals stay flat or decline marginally. "Imagine an IT employee who earns Rs 10-20 lakh a year, and he is suddenly asked to go home, and work from there. His access to cafés, computers, telephones, printers, high-speed broadband is all then 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?," the PE firm head said.
In his view co-working spaces will take the biggest hit because start-up leaders will not be able to afford more seats in order to cater to social distancing norms, and may already be struggling with small balance sheets and revenue that is yet to grow. Virwani, however, said co-working offices with glasswork box-type cubicles are actually cleaner and safer, as they can be locked up.
Several commercial deals have been put on hold. Seven out of 10 request for proposals (RFPs) for space for approximately a million and and a half square feet across the nation in different cities have been put on hold, thanks to the pandemic, said Samir Jasuja, founder of PropEquity. He also added that while office space rentals are holding good, retail customers in office spaces are not paying their rentals across the country," Jasuja says. As a result he says in the future "Prices won't go up for rentals."
"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 per cent," 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."
The bigger worry is how to start construction as rules have changed. "You need to 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 to begin."
Razack agreed, adding construction wouldn't start before Diwali.