The coronavirus outbreak and the subsequent lockdown have started impacting small companies which have begun negotiations with their landlords for the deferment of lease for the 21-day period, citing the force majeure provision and even rentals in some cases, say real estate experts.
Big corporates that take up large conventional office spaces, however, are in a wait-and-watch mode. They are keeping tabs on their real estate costs and evaluating the immediate impact of COVID-19 and whether an immediate change in their real estate strategy is warranted with their legal teams.
“They are looking at de-risking and minimizing their costs with a clear focus on business continuity planning. While there are no immediate changes to lease agreements, any modifications would be a function of how much time it will take for things to get back to normal and the severity of the coronavirus impact,” says Anckur Srivasttava of GenReal Advisers.
In case of large corporates, real estate decisions have a longer lead time and a longer legacy impact. Any real estate decision in their case has massive financial ramifications running into millions of dollars apart from a strategic impact. The decision to alter real estate space take-up strategy cannot be as quick as that in case of swing spaces (flexible or co-working spaces), he explains.
Having said that, these firms are keeping an eagle eye on their real estate costs and actively evaluating the immediate impact of COVID-19 and whether an immediate change in their real estate strategy is warranted.
Some of the large corporates that Moneycontrol spoke to said that, while they had no immediate plans to renegotiate their lease agreements and had paid their rents for the month, their legal teams were looking into the option of taking recourse to the force majeure provision inbuilt into their agreements.
Top occupiers in real estate parlance are those companies that typically occupy large floor plates and their pan India portfolios are in the 100 lakh sq ft range. Small occupiers are those that occupy conventional office spaces spread across 30,000 sq ft to 50,000 sq ft.
“Small corporates are reevaluating their business plans, growth projections and hiring plans in lieu of this lockdown. One in every five clients have not stopped paying rent but surely reached out to their landlords for deferment of rents at least for the lockdown period and even started renegotiation for rentals. Landlords are yet to respond,” says another real estate expert.
There are no such requests from top occupiers yet, he says. “Most big occupiers are in a wait and watch mode and have sought legal guidance. Surely, if a rebate is given by one big landlord, others may follow,” he adds.
Companies that would have to take the biggest hit will perhaps be those in the services business. “If their businesses suffer due to COVID-19, their requirement for office space may shrink by a few notches but if they are into Research and Development, they may not be hit hard because research is an evolving business,” says a transaction expert.
The impact on rental leases will also be governed by how long the pandemic lasts and, for that matter, the period of the lockdown. Everything depends on when the lockdown gets over. Most companies would be looking at parallel strategies. If the lockdown lasts until April 15, the strategy would be different from say if it lasts until June.
“If the lockdown gets over by April 15, there may be a delay of a quarter but if it is until June, the revenues may get impacted by two quarters and the entire business plans would have to be reworked. They would have to plan their business continuity plans. Till date, most companies had taken into account the BCP but not medical BCP,” says the expert, adding the first thing companies will look at in the months ahead would be reduction in space take up and that may impact absorption of office spaces going forward.
“One can assume that footprint may reduce by 5-10% certainly in the floor plate occupied by some corporates if the lockdown extends up to two quarters,” he says.
Shrinking Indian economic growth, coupled with global economies’ sharp reaction to the ongoing COVID-19 pandemic, will certainly impact Indian office segment. Net office absorption is expected to see a dip of 13-30 percent in 2020 on account of COVID-19, Anarock Research has said.
Given the sluggish business environment and that is likely to be prevalent post the COVID-19 outbreak period, it will put rentals under tremendous pressure, Anarock said in its report.
Large leases, renewals and commitments are likely to be affected causing rentals and renewals to be negotiated. Large occupiers who have not been able to operate to their full strength during the pandemic may factor this period while renewing and would negotiate the rentals. Consolidation plans may be to move to peripheral locations to contain the rental pay-outs. In our opinion, rentals are likely to come under pressure, as renewals and new leases are likely to be negotiated intensely, it noted
The current testing time will also compel many Indian operators to explore various options that can be leveraged in the future to optimize cost, it said.
Predictions for 2020 are based on the previous period of sluggish demand experienced in India during 2012-14 and the global economic crisis of 2008.
“Amidst the pandemic and the global health crisis, the demand for office space is likely to drop. As many occupiers may not be able to assess the impact until the situation is resolved, they will reassess their position. While there will be some significant slowdown in their businesses, the expansion or consolidation plans may also be shelved,” the report titled COVID-19- Will it reset Indian real estate has said.
The US headquartered companies typically lease between 40-50 percent of annual net off take of office space in India. Given the high chance of the US economy suffering due to the COVID-19 impact, its negative effect will be felt in India with a drop-in office space leasing. European Union (EU) headquartered companies do not influence India’s annual office space offtake as much as their contribution typically hovers around 10-12 percent, but much of that is going to evaporate given the very high adverse impact of COVID-19 in Western and Southern Europe and in the UK.