The newly appointed Chief Executive Officer (CEO) for India and Managing Director, Market Development for Asia at Colliers, Ramesh Nair believes the pace of vaccination will drive demand for office spaces in the future. In an interview with Moneycontrol's Vandana Ramnani, he pointed out that residential demand is gradually picking up and has already returned to pre-COVID levels in some markets. But he also warned about the uncertainty around the third wave.
Excerpts of the interview:What’s your outlook for the office market after the COVID second wave?
Overall office demand was bouncing back in March-April 2021. Things gradually slowed down after the second wave. The re-entry into offices was beginning to get into double digits but went back into single digits after the onset of the second wave.
Everything is correlated to the vaccination drive. We will see some pent up demand being released with increased vaccination. Things would get back to normal by early 2022 when we would see most employees returning to the office, depending on local government rules prevalent at that time. More than 50% of the offices are taken up by IT companies. Once they resume, one will see office absorption picking up well. Re-entry of employees and the vaccination drive will have a direct impact on the office market going forward.
Office absorption this year will be comparable to last year when it touched the 25 million sq. ft. mark. A year before that it was at the 46 million sq. ft. mark. This year too, it will be around the 24 to 25 million sq. ft. mark. Not much of an improvement, but next year, I am confident that things will definitely improve.
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
Everybody needs an office. People have realised that they cannot ignore the office. It is a place to learn, socialise and connect. Things may change. Demand may go down slightly but companies do need more space. If companies have to create a memorable experience for their employees, they require office spaces. Post-pandemic, offices will be repurposed. Sustainability and green programmes will be accelerated more than ever before.
The corporate world is in a transitionary phase as re-entry plans continue to evolve and there is still anxiety around re-entry timelines. On the other side, employees feel burnt out working from homes and are eager to get back to offices. But today, different companies in different sectors are moving at different speeds. Companies need to plan their future occupancy based on the assumption that employees will work 1-2 days from home.
Space requirements will surely get rationalised. The 80 sq. ft. per person space norm will go back to 100 sq. ft. per person. Decongestion has taken place after the pandemic. Today, we are talking about work-from-office, work-from-home and work-from-a decentralised hub. All these three levels do not suggest that offices will go away.
In China, office demand has returned to pre-COVID levels. For companies, people are precious assets and they need to be taken care of. Offices are places where ideas get exchanged, where collaboration takes place. The sharing ratios may undergo a change but that does not mean demand for offices will go away.
Having said that, we are not expecting demand to go back to pre-COVID levels this year. It will take some time. Occupiers are still cautious.
It was expected that work-from-home policy would have an adverse impact on office demand but the need for larger space to maintain social distancing could compensate some of the possible loss in demand to work-from-home. Going forward, things will certainly change. Last year we had predicted that 15% of employees will be working-from-home.
Today, that may be around 20%-25%. Rentals too are being renegotiated. There are lots of renewals happening. Companies are focusing on reducing Capex numbers. Some companies are asking landlords to invest in Capex and landlords are more than happy to do it. Landlords are willing to offer tenant improvement allowances which will give occupiers the opportunity to retrofit at reduced costs
What about rentals? Will they be pushed down?
Quoted rentals have dropped since the onset of Covid, and landlords are offering more concessions to maintain occupancies. There may not be too much reduction in rentals because supply is being pushed out even though vacancies are increasing gradually. Most of the vacancy is coming in Grade B+ assets. Real estate developers owning Grade-A office buildings have reported 92% to 98% of rent collections during Covid.
Are you bullish about private equity and institutional funding finding its way this year?
Very bullish. Last year, the office was the biggest asset class and continues to be so even this year. Our latest numbers for H1 2021 show that office assets have already achieved a more than 45% share of last year’s funding volume and a 35% share of the total PE and institutional investment this year. Globally, close to $760 billion was invested in real estate by PE and institutional investors in 2022. India was just about $5 billion, which is 0.7% of the global capital available. But there is a lot more potential capital coming into India. The Blackstone, Prestige and Brookfield-RMZ deals have been noticed by the global investor community.
Data Centre continues to be of interest but most investors prefer to invest in operating companies rather than only real estate.
Larger developers will consolidate land from smaller developers, backed by PE capital. Obsolescence of existing assets and rental correction are the big concerns.
Do you see more REITs getting launched this year?
REITS are expected to do well given that they have very good management teams with great sponsors, 90% occupancy and a higher number of MNC and Fortune 500 occupiers. In the next 12 months, I expect two to three more REITs getting launched. Going forward, we may also see retail and industrial REITs becoming a reality in the country.
However, one needs to closely track annual rental growth, mark-to-market lease expiries and on-campus development.
What is the future of the housing market, especially when we are staring at the third wave?
It is bouncing back. Interest rates are low and there is demand for bigger homes. Developers have become realistic about pricing as they want to reduce unsold inventory. The government is also focused on driving interest rates down and increasing sales. The latter half of the calendar year will see people going back to construction sites that were not happening on account of the second wave. Things will improve.
Right now, there is enough ready-to-move-in inventory available. But this may get reduced in the next few quarters due to which there may not be a choice in this segment and the buyer would have to consider under-construction units.
New launches too have been impacted on account of construction and labour issues, especially since labour has gone back to their villages after the second wave.
Is the residential market demand at pre-COVID levels? Should you buy a house now? Will prices correct further, or will they move up going forward after the third wave?
Though demand is slowly picking up, it will still take some more time for housing demand across India to return to pre-Covid levels. But in some markets, it has already returned to pre-Covid levels, especially for Grade A and institutionally backed developers. There is still uncertainty around the third wave and slow vaccination. Whilst offices are witnessing higher occupancies, many companies still have a substantial portion of their employees working from home. In many organizations, many prospective homebuyers have gone back to their native towns and cities. So the housing industry will have to wait for some of these young prospective buyers to come back to the markets and boost residential demand to pre-Covid levels.
However, for those looking at buying their own house, especially for self-occupation, this may be the ideal time as developers are keen on reducing their unsold inventory and are mainly focussing on completing existing projects than launching new ones. Developers taking a practical approach on pricing and not holding back on inventories. Prices are expected to move upwards as unsold completed inventory significantly reduces. Prices will start going up as the economy in general and housing markets specifically show improvement with improvement in vaccination rate and fear of more waves of infections getting reduced.
Buyers understand that this is the best time to buy. There would also be profit booking in the stock markets which would funnel to the residential markets. For the 1st time in the last 6 years, we are also seeing a pick-up in luxury residential and larger apartment.
Which asset class is likely to make a comeback first once the COVID-19 pandemic subsides? How soon is that expected to be?Whilst offices will show the highest traction once Covid-19 subsides, we can also expect the retail and hospitality assets to show a marked improvement as activities normalise. Removal of restrictions on operations, timings and even movement will benefit these asset classes as they will be able to cater to all their customers. We will see stressed landowners disposing land to avoid default and there will be more plotted developments gaining traction. Meanwhile, other asset classes such as housing, data centres, industrial and warehousing will also grow significantly.