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COVID-19-induced economic slowdown in US, Europe big risk to Indian office demand: report

Pre-leased upcoming supply and near-term deals in the leasing pipeline may get deferred by one or two quarters depending on how the COVID-19 situation evolves

While there may not be any material risk to existing commercial property leases, incremental leasing decisions may get deferred by a couple of quarters till the fourth quarter of the calendar year 2020. COVID-19-induced economic slowdown in Europe and the USA over the medium term may be a bigger risk to Indian office demand in CY21-22, says a report.

Since over two-thirds of the Indian office demand emanates from multinational companies from Europe and the USA, economic slowdown in these countries may impact medium term demand for offices in India, an analysis by ICICI Securities said.

Office leases in India are typically long term in nature and are spread over 8-10 years with annual rental escalations of 5 percent. Two-thirds of Indian office demand has been driven by MNCs headquartered in USA and Europe over the last decade (CY10-19) especially to set up captive centres in technology, fintech, pharmaceuticals and consulting.

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“Pre-leased upcoming supply and near-term deals in the leasing pipeline may get deferred by one or two quarters depending on how the COVID-19 situation evolves. We see any COVID-19 induced economic slowdown in the USA and Europe over the medium term as a bigger risk to Indian office demand in CY21-22E,” says an analysis by ICICI Securities.

Also, with just a few large developers in India controlling high quality Grade A supply, the situation this time around is unlike CY08 where the global economic meltdown coupled with oversupply in India led to an extended bear cycle of between CY09-13 for the Indian office market.

A silver lining for Indian office assets is a global fall in interest rates which would make a 7-8 percent yield in India attractive for global investors, it said.

Among cities, Bengaluru and Hyderabad markets continue to see the strongest demand among occupiers while select micro-markets in other cities such as Central Business District (CBD) areas of Gurugram in NCR continue to see strong occupier interest.

“At the beginning of CY20E, we expected net absorption to remain in the 35-40 msf range in CY20-21 as well. We are of the view that these Grade A assets command a scarcity premium and cap rates for high quality assets should continue to see valuation multiples sustain between 7-8 percent in an upcycle,” the analysis said.

With a significant number of leases also up for renewal in CY20-21E, IT/ITeS office occupiers in markets such having low office vacancies will either have to pre-commit space in new buildings or look to pay higher rents in existing offices.

The Indian Commercial Real Estate (CRE) office market saw record leasing in CY19 with 42msf of annual net absorption. The office market has been in an upcycle over CY14-19 with rising rentals, falling vacancies, consolidation among developers and emergence of REITs. At the beginning of CY20 (January 2020), the outlook was bright with healthy pre-leasing for upcoming supply.

However, the evolving global situation owing to the coronavirus threatens to spoil the party, the analysis added.

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First Published on Mar 17, 2020 12:30 pm
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