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Exclusive | New REITs may be delayed, commercial leasing activity to remain flat in short term, says Anshul Jain of Cushman & Wakefield

The Cushman & Wakefield’s Managing Director, India and South East Asia, says return-to-office plans will be on hold for some time, with vaccination determining the timeline.

Anshul Jain, Managing Director, India and South East Asia, Cushman & Wakefield, thinks that the real estate sector learnt from the last year’s outbreak and is better prepared for coronavirus-led disruptions this time, which will have a near-term effect but the long-term story remains intact.

With more than 25 years of experience, Jain, who holds a master’s in finance and an international MBA, has his finger on the pulse. Warehousing and logistics segments will draw more investments as demand from ecommerce will only grow, he says. Cold-chain storage is another segment he is bullish on, with the pharma and agriculture sectors expected to see an expansion.

The 49-year-old Jain, who has worked and lived in Southeast Asia and Europe, says relatively higher yields in a low-interest-rate environment globally will continue to drive foreign investments into India, though the second wave will put these plans on hold for some time.

In an email interview to Moneycontrol, Jain, who is based in Singapore,  talks about the impact of the second COVID wave on commercial, residential, retail and warehousing segments. Edited excerpts:

How will the second COVID-19 wave affect the office segment? Will work-from-home lead to corporates rationalising their space requirements and renegotiate rentals?


COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

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.

How many types of vaccines are there?

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.

What does it take to develop a vaccine of this kind?

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.

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The resurgence of COVID has hit the sentiments once again and while the market is likely to remain muted in the short term, a prolonged sharp reduction may be unlikely. Leasing activity could remain flat in the short term, with limited deal closures but we could expect a quick recovery towards the end of the year if the situation gets contained over the next three to four months.

As we move forward this year, a broad-based immunisation programme remains the key driver in defining the pace of recovery and a full-fledged rebound can be expected in 2022-23.

Term renewals will continue to be the preference of occupiers with a focus on reducing capex spends and a general cautious "wait and watch" approach in the next few quarters. Cost optimization and capex-light solutions will be the norm in the short to medium term with higher demand for managed spaces.

There will be a temporary hold on return-to-office plans with vaccination being the biggest driver determining its timelines going forward. The return of employees to the workplace will also vary by organizations, depending on business demands and operational requirements.

Will rentals correct and vacancies increase?

The overall conditions remain favourable for office occupiers over the next six-12 months with landlords being strategic in offering concessions and incentives. Occupiers will continue to push for better terms and re-negotiations as landlords look to attract/retain tenants, but institutional landlords are unlikely to offer significant rental discounts.

Larger tenants with bigger space requirements are still going ahead with expansion/consolidation strategy to take advantage of the market conditions and to plan for their steady growth over the next four to five years. Vacancy rates are likely to increase as space rationalisation continues with supply exceeding the net new demand.

What will be the impact on private equity and institutional funding? How long is the pain expected to last?

The pandemic period has seen two REIT listings, signifying the confidence in rent-yielding office assets. It has also seen marquee investors like Blackstone and Brookfield going ahead with colossal transactions, which speaks volumes on the strength of this space. Investors will continue to look for quality investments to deploy the dry powder. Relatively higher yields in a low-interest rate environment globally will continue to drive foreign investments into India, though the current situation of a raging COVID-19 will pause these plans in the near term.

Despite near-term uncertainty, India’s office market fundamentals remain robust with IT-BPM, BFSI and GCCs likely to drive growth; a large talent pool, competitive office rentals will continue to attract global corporations.

PE/institutional funding will be impacted in the short term, long-term capital will continue to scout for investment-grade rent-yielding assets at lower valuations. Though the investment story remains strong and intact, COVID-19 has certainly made institutional investors "pause and prepare" their strategies and fund deployments.

The warehousing and logistics segment will draw more investment focus with a prolific demand in the ecommerce sector and a possible long-term alteration in buying behaviour.

In the residential segment, credible developers will continue to see domestic fund flows, including some distressed opportunities. Data centres will also continue to see more investments propelled by the rising digital economy and capacity addition by developers.

Will REITs be hit?

REITable assets and new REITs are unlikely to be seriously impacted by the second wave as these are Grade A assets with marquee tenant rosters and very little vacancies. While new REITs could be delayed in the short term, the preparations would continue, and the listings could gather pace in line with market recovery over the next 12-24 months. Recent government initiatives such as allowing FPIs to debt finance REITs and easing of compliance norms will improve the outlook further.

Will the second wave affect the housing sector and should you buy a house now?

While the second wave has certainly dampened the momentum, the residential segment had picked up in the second half of 2020, the impact could be less severe than what we had witnessed when the pandemic had broken out in the first quarter of 2020.

This is a good time to buy a house, provided the buyer has financial stability, as home loan rates are at an all-time low in over a decade and will continue to remain so in 2021. With new launches likely to remain subdued in short term, developers are focussing on offloading the existing inventory by rolling out various incentives to push sales. That, too, will boost buyer sentiment.

Certain states such as Karnataka, for that matter, have announced stamp duty cuts for select units (first registration of apartments valued between ₹35 and ₹45 lakh). Earlier, the stamp duty cut by Maharashtra had spurred the demand but the concessions have expired on March 31, 2021. Currently, the government has announced a 1 percent reduction in stamp duty exclusively for female homebuyers, which will be applicable from April 1, 2021.

The key challenge right now is the likely decline in consumer sentiments due to the COVID-19 surge and the severity of the second wave. Reduction in active caseload and faster vaccinations could improve consumer demand later in the second half of 2021 and is expected to drive sales. The millennials will continue to account for a major chunk of sales and the demand for spacious villas and bungalows is likely to grow further.

Will the retail sector feel the pinch more this time?

Localised lockdowns in large cities and closure of shopping malls, F&B outlets and multiplexes have led to a sharp decline in footfalls and sales in March and April. The market has shown some signs of recovery in Q1 2021 but the second wave has dampened the momentum. Market weakness is expected to continue in the next couple of quarters and recover gradually in H2 2021 in line with the easing of restrictions and wider rollout of vaccination.

Revenue sharing arrangements are likely to continue in general but retailers would be looking for further discounts and rental negotiations to tide over the current crisis. Superior malls which usually have ultra-tight vacancies (~ 3-5 percent) are unlikely to witness significant exits but the new mall supply is likely to be deferred again. However, medium to long-term growth prospects remains healthy due to recovery in consumer demand, low supply of quality retail space and expected investments by large domestic and global players (through dedicated platforms).

Main streets are likely to witness faster recovery, possibly from Q3–Q4 2021 and leasing across prominent main streets will be driven by a faster recovery in footfalls and sales towards the end of 2021. Rental discounts will continue selectively depending on tenant profile and scale of operations. Higher demand from supermarkets/hypermarkets and consumer durables to continue; leasing in apparel, F&B segments to remain below trend once again.

How will the warehousing and logistics segment benefit from the second wave?

The industrial segment (warehousing/logistics) will be a major beneficiary in the post-COVID-19/post-second wave era. Growth in ecommerce, robust demand from third-party logistics (3PL) players and the manufacturing sector will drive demand for modern warehouses. Government policies such as production-linked incentives (PLI) and integrated logistics hubs across the country will boost industrial investments with companies such as Samsung, Foxconn, Dell, HP, Wistron and other electronics manufacturers already setting up the production lines under the PLI scheme.

Going forward, manufacturing of medical equipment and pharma APIs is likely to be expedited. Additionally, cold-storage units are likely to emerge as a new, high-growth alternative asset class driven by insufficient existing capacity; agriculture and pharmaceutical sectors will drive greenfield cold-storage investments. The dearth of an adequate supply of investment-grade warehouses will boost investments and new supply additions. Global players such as Blackstone, Ascendas, ESR, CPPIB, etc will continue to scout investment opportunities.

How will the real estate sector do if a third wave of the pandemic were to hit the country?

Consumers and businesses, including developers, have adapted to COVID-19 norms to a larger extent as compared to 2020. Localised lockdowns across cities may not last long and the impact on the economy is likely to be less severe as compared to the first wave. While controlling the current surge and expediting vaccinations are the top priorities for the government; ramping up healthcare infrastructure will also help in confronting any possible third wave.

Going forward, any possible third wave could be less damaging to the economy and real estate sector as a whole considering a wider rollout of vaccination is already underway and we expect state/central governments to be better equipped should there be a public health emergency. Social distancing, hygiene norms and other COVID-19 guidelines are likely to continue despite vaccination.

With the second wave, companies are already pushing a return to office timelines to Q4 2021/Q1 2022, should there be a third wave, return to office timelines could be pushed further. While there will be some impact on commercial office, retail and residential sectors, the severity could be moderate as compared to the first/second wave. There could be a lesser impact on construction activities as well but the impact on hospitality, travel and educational sectors will continue. Some impact on institutional investments is also likely.
Vandana Ramnani
first published: May 13, 2021 02:22 pm
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