With a slew of companies deciding to focus on work-from-home on account of challenges posed by the coronavirus contagion and commercial lease agreements worth Rs 6,860 crore for 77 million sq ft expiring in the next 12 months, the impact on the commercial real estate space across the country is anybody’s guess.
According to CRE Matrix, over 40 million sq ft of Grade A commercial office space is leased by top three tenants in Indian metro cities and over a half of it is out of the lease lock-in.
This means that these corporate tenants have completed the lock-in period as per their contracts and can move out by serving a notice period. This also means that there may be enough room for them to reassess and renegotiate terms with their landlords and exit in case of financial and COVID-19-related compulsions.
Real estate experts say that, while these companies may consider reassessing space take-up, they may not exit long-term leases immediately.
As per the CRE Matrix report, the total commercial leasing book in India across top eight cities is about Rs 43,932 crore for 468 million sq ft of space which means that this is the amount that landlords across eight metro cities received as rentals every year.
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Around 249 million sq ft of office spaces across India have either gone past their lock-in expiry dates or do not have any such clause and it amounts to Rs 23,228 crore of annualized rent receivable to the landlords.
This means that almost 50 percent of companies are outside their lock-in period currently.
Around 219 million sq ft of office space across India has a lock-in expiring in the next 12 months or beyond and it amounts to Rs 20,704 crore of annualized rent receivable to the landlords, the CRE Matrix report has said.
“It may be a few quarters before top corporates decide to take drastic measures such as reducing their footprint. Large corporates can absorb three months of pain as they are sitting on large reserves and revenues are still flowing but if this pain were to continue into September or October, there may be layoffs and if that happens they would look at cutting real estate costs simultaneously,” says Abhishek Kiran Gupta, the chief executive officer of real estate intelligence firm CRE Matrix.
He does not see big corporates moving out in a hurry. “They will strategise, look at the cost cutting advantage, take a global call and then an India call,” he says, adding if they were to negotiate, prices of commercial real estate are most likely to come down.
He also points out that compared to 21 percent of people working from home in the US, primarily white collar workers, only about 1 percent in India are currently working from home.
“The work-from-home component may not go up more than 4-5 percent and would be limited to some segments over the next five years,” says Gupta.
Will rents fall?
The commercial rental market is also divided into institutional landlords such as Blackstone, Brookfield and individual landlords. “The big institutional landlords of late may have at best deferred payments for their tenants. It is the individual landlords who may have given discounts ranging from 10-50 percent on rentals, say experts.
In post-COVID-19 times, it is the local landlord who has rented out a 5,000-10,000 sq ft office and where lock-ins have expired, who would be most vulnerable far more than institutional ones.
“From an institutional perspective, the fall in rentals would be anything between 5 to 7 percent based on who is threatening to leave. A concession may be offered based on old relationships rather than force majeure but at an individual landlord level, the cut could be as high as 20 percent also,” says Gupta.
Sharad Mittal, CEO - Motilal Oswal Real Estate Fund, is of the opinion that it may take at least three quarters up to March 2021 for the real impact of COVID-19 on commercial office space to be clearly understood.
“By March 2021, it would be clear as to how many companies have given guidance on WFH, are actually able to do it and the number of leases that are up for renewal. Until then, it would remain in a flux. Not too many people will take a call on expansion. Vacancies and a call on whether to launch a new REIT will also be pushed to the third quarter,” he says.
Assets under REITs may be impacted
As for assets under REITs, those would be impacted in the same way as commercial buildings. A REIT is a company that manages a pool of rent-yielding assets and allows developers to monetise them. Technology firms occupy a major portion of these top grade commercial real estate assets.
“There are three components associated with a REIT – one is rental paid out on a regular basis, there is an escalation in rentals built into the contract which is generally 3- 5 percent per annum and a yield compression that is expected to be around 8 to 8.5 percent. Post the pandemic, these have been impacted like any other office building,” he explains.
Several companies have said that plan to have a certain percentage of employees to work from home even post the lockdown and many are considering deferring new leases, reducing the size of the rented properties corporates in a bid to save real estate cost.
A recent report by JLL titled India Real Estate Market Update Q12020: Offices, net absorption of office spaces fell 30 percent in the March quarter from the peak seen in the same period last year. Completion of new properties, too, were affected due to delay in obtaining requisite approvals from the government in the beginning of March, which led to a 40 percent dip in new office constructions to 8.6 million sq. ft. in the March quarter from a year ago.
Recent media reports have said that some professional services firms and IT companies such as Deloitte, PwC, KPMG, EY, Accenture and Cognizant are considering surrendering a part of their rented office space as they look to implement work from home for their employees even post lockdown. NBFC Clix Capital is planning to vacate half of its office space. A report in the Economic Times has also suggested that global IT firm IBM may be looking at reassessing and exiting half of its long-term tenancies in India.Tata Consultancy Services, India’s largest IT services firm, has said that at least three-fourths of its employees would be working from home by 2025, with only a quarter of them occupying office space regularly. Among large banks Axis Bank was working on a plan to implement regular work-from-home guidelines for two-three days of the week.