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COVID-19 impact | Commercial rentals may fall by 5-10%

Work from home may gain strength, but likely to account only 10-15 percent of the workforce.

The outbreak of coronavirus disease will have a short-term impact on India's office market, with demand likely to fall by 45 per cent and rentals softening by 5-10 percent, said Anshul Jain, Managing Director- India and South East Asia, Cushman & Wakefield.

The net leasing or absorption of office space may fall to 25 million sq ft this year as against 45 million sq ft during 2019, he projected.

Jain, however, was bullish on the medium-to-long term growth prospects of the office market in India, which he said would continue to be an attractive destination for outsourcing of various kinds of jobs. The de-densification of office space would largely compensate for any fall in demand due to adoption of Work From Home (WFH) policy by corporates, he added.


Jain was speaking at a webinar organised by Workplace Trends India.

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Also Read: COVID-19 impact | Low policy interest rates and 8.5-9% yield may drive demand for Grade A commercial assets

"The commercial real estate rental situation at present is very different from the Global Financial Crisis situation of 2008-09, when the supply outstripped demand, we were in an oversupplied situation then, right now we are not in an oversupply situation. Having said that there will be short-term softness in the market and I think the rentals may come down in some pockets between 5 and 10 per cent," Jain said.

On Tushar Mittal's query, who heads interior design firm SKV, on how the office leasing market is expected to perform, Jain said the demand may rise post-Covid-19.

"The reason behind this, especially in the case of India is that we were squeezing more and more people in the square foot that we had. About 7 to 10 years ago we were talking of about 100 to 120 square feet per person, and most of the company today were talking of 60-80 square feet per person depending upon who you are, now that’s going to change, we may see an increase in space per person," said Jain.

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On WFH policy, Jain said the companies would certainly give more flexibility to employees. "Work from home will gain strength, but that may be just 10-15% of the workforce," he said.

However, Jain said the work from home would be a very challenging proposition in India because of lack of proper physical and IT infrastructure.

"Work from home is very difficult in south Asian countries, including India. The average people working in the company are 27-28 years old, most of them are either living with their parents in a small house or living with their friends, friends could be working for competitors and this can create problems. Other deterrents are electricity shedding off, Wi-Fi breaking down and so on. The cost of work from home in home office set up and individual broadband connection could be humongous," he said.

Regarding the impact of Covid-19 on the residential sector, Jain said the housing prices were currently ruling at lower than 2012 level and there was minimal scope of further correction. He advised fence sitters to purchase residential properties as this could be good any other time.

The report titled 'COVID-19 and Indian Real Estate: What Does The Future Hold' also said that rental growth is expected to cease. There may be a minor flexibility in negotiations for deal re-pricing to cause a 5-10 percent rent reduction across corridors, but local demand-supply dynamics will rule.

Net office space leasing could drop 45-55 percent to 21-24 million sq ft during 2020 across major cities as companies are likely to defer their decision on expansion plans after the outbreak of COVID-19, according to the report.

"Office market remained robust in January-February 2020 before tapering off in March as COVID-19 and lockdown took hold. Deals in advanced stages pushed to the backburner as corporates focused on BCP (business continuity plan) measures and put RE (real estate) decisions on hold," the report said.

PE Inflows in 2020 to be 45-50 percent lower y-o-y. This may be a short-term blip as PE funds realign their capital allocation stack.

Rental growth in the office market is likely to cease; minor flexibility in negotiations for deal re-pricing to cause a 5-10 percent rent reduction across corridors, but local demand-supply dynamics will rule. Flex space demand in 2019 (around 7.0 msf), to drop by 50-60 percent year-on-year in 2020, the report said.

Markets like Bengaluru and Hyderabad where pre-leasing levels are high will continue to dominate upcoming supply over the rest of 2020 and 2021 (about 50 percent share), it said.

Ongoing office space requirements undergoing re-planning. Companies may explore alternate strategies around flexible office, agile workspace formats and dispersed workplaces to achieve cost savings, the report said.

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First Published on Jun 19, 2020 07:43 pm