Leasing activity in the commercial real estate office market is expected to improve from January 2022 when select corporates may take a relook at their space requirements before calling employees back to offices, and international travel may pick up on increased Covid-19 vaccinations, an analysis by ICICI Securities has said.
While vacancy levels may remain flat in Q4CY21, the trend is expected to reverse from Q1CY22E (Jan’22 onwards) with the improved pace of vaccinations across India, select corporates recalling employees to offices and gradual pick up in international travel, it said.
The broad consensus is that 15-20% of employees may permanently Work from Office (WFO), 10-15% of employees may permanently Work from Home (WFH) while the balance 60-70% of employees may work under a hybrid model of mixing WFO with WFH.
While the jury is out on the eventual outcome of the back to office plans of various corporates, pan- India net absorption of 18.5msf is expected in CY21 (11.5msf achieved in 9MCY21) and build in a recovery in CY22E with net absorption of 26.8msf, the analysis said.
Also Read: Wipro to get more employees to office from January 2022, aims to strengthen teamwork
Pre-COVID, Bengaluru had low Grade A vacancy of 5% and accounted for around 22% of the net absorption of office space in CY19. Bengaluru market is likely to retain more than 25% of net absorption over CY21-23E, the analysis said.
Pre-COVID, the Hyderabad market clocked record annual absorption of 4.9msf in CY17 and 6.0msf in CY18. In CY19, Hyderabad has seen record net absorption of 9.3msf and is now on par with leasing levels seen in Bengaluru. However, with fresh supply infusion of 14.5msf over Q1CY20-Q3CY21 (Jan’20-Sep’21) and corresponding net absorption of 8.7msf, Grade A vacancy levels have risen to 13.3% in September 21 from 5.5% in January 2020. Going forward, it is expected that the Hyderabad market to continue to clock annual net absorption of 5-6msf annually.
Kolkata and non-CBD regions of Gurugram continue to suffer from supply glut where current vacant office space is expected to take at least 24-36 months to be absorbed. In the peripheral markets of Gurugram and Noida, rental values will remain under pressure. However, assets in better locations, such as Gurugram CBD, may see rentals holding up, owing to limited availability of quality space, it said.
Leasing activity is expected to pick up from Jan’22 as international travel may pick up again along with effective Covid-19 vaccines. It is expected that cumulative net office absorption of 75-80msf over CY22-24E compares well with overall upcoming Grade A supply of 114msf over the same period of which 20-30% may be shelved as it is speculative supply, leading to effective supply of 80-85msf, it said.
Along expected lines, CRE office market has seen a 15% YoY decline in 9MCY21 (Jan-Sep’21) net absorption at 11.5msf. However, with a 21% QoQ pick up in Q3CY21 net absorption to 4.3msf, green shoots have re-emerged with the improved pace of vaccinations across India, select corporates recalling employees to offices (footfalls at 20-25% of pre-Covid levels as of Oct’21) and gradual pick up in international travel.
With India continuing to offer competitive rentals of around $1psf per month in IT/ITeS driven markets of South India and NCR/Pune and robust hiring plans of domestic/MNC IT/ITeS companies, it is expected that there will be a pickup in office absorption from Jan’22 onwards.
Analysts are bullish on office asset developers such as DLF, Embassy REIT, Mindspace REIT, Brookfield India REIT and Brigade Enterprises. Key risk to our call is the emergence of a third Covid wave across India and USA/EU geographies which account for two-thirds of office absorption in India, the analysis said.
It said that commentary from REIT managers and other large office developers indicate that leasing discussions which were on hold owing to the second Covid-19 wave have now been revived with existing occupiers talking about potential expansion and tenants looking to surrender space earlier, considering retaining and possibly expanding space.
Also Read: Why TCS employees will work from office before they return to WFH
The three REITs are expected to offer distribution yields of 6-9% over FY22-24E along with 10-22% capital appreciation as per current target prices. While a rise in global interest rates is the key risk, cumulative potential returns of 18-26% provides adequate valuation cushion, it said.
India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban micro-markets hovering around 1 USD/psf/month or Rs70-75/psf/month. The country also leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating each year, the analysis said.