What appeared to be a short term pullback from institutional investments in Indian real estate in the first three quarters of 2020, came back with a bang in the last quarter. While most investors remained cautious as asset pricing, and revenue stability became challenging, large portfolio deals during the last quarter led to total investments of over $5 billion during 2020, a report by JLL has said.
The total value of deals in 2019 stood at $5,431 million compared to $5,034 million in 2020, according to the ‘India Real Estate Outlook – A Growth Cycle’ report launched by JLL. The office space segment with a total deal valuation of $3,102 million led the pack among asset classes in real estate.
In 2021, the IT/ITeS sector is expected to remain the key occupier group while demand from emerging sectors such as e-commerce, manufacturing and healthcare is likely to increase further, the report said.
Strong market fundamentals in the form of sustained IT sector growth, increasing demand from sectors such as e-commerce, healthcare, FMCG and the growing presence of institutional investors will continue to drive the office market in 2021. The year is expected to witness close to 38 mn sq. ft of new completions, while net absorption is likely to hover around 30 mn sq.ft, the report said.
This will be on par with the annual net absorption levels seen during 2016-2018. With the roll-out of vaccines and the further easing of COVID-19 fear, there is a lot to look forward to and 2021 will be the year when India enters a new cycle of office market growth, it said.
The primary markets witnessed a strong response to listed REITs, providing a new avenue for retail and institutional investors, the report said.
Business activities resumed with the gradual opening of the economy in the third quarter of 2020 and the office market witnessed green shoots of recovery. Sentiments improved further in the last quarter of 2020 with the news of potential vaccine development, and the office market continued its recovery momentum. Net absorption increased by 52%, while new completions grew by 39% when compared to the preceding quarter, the report said.
“India’s emerging REITs market is expected to attract cross border flows and further improve transparency and asset pricing leading to more mature markets. This loop of increasing maturity and capital flows will lead to investments scaling new peaks. Office market is on its road to recovery as it is likely to witness an increased number of new completions of close to 38 mn sq. ft, while net absorption is likely to hover around 30 mn sq. ft,” said Samantak Das, Chief Economist and Head of Research, JLL India.
Listing of new REITs is expected to provide opportunities for institutional investors to build asset portfolios or co-invest with existing platforms before the IPO, the report said.
The provision of the Union Budget 2021-22, allowing to raise debt from foreign portfolio investors at low cost will lead to more asset acquisitions by REITs. Office assets are expected to the preferred option due to stable rental yields and income visibility.
Asset pricing is expected to improve with resumption of full economic activity during the year. Core office assets with steady incomes are likely to benefit from better price discovery. On the other hand, opportunistic assets are expected to witness more price adjustments as they lack income certainty and entail more risk, the report said.Range-bound vacancies and stable rents
Given the range-bound vacancy levels, office rents in 2020 remained stable across the seven major office markets in India.
However, landlords did consider the situation and were more accommodating to the demands of occupiers. Landlords across markets were more flexible in providing increased rent-free periods, reduced rental escalation and fully furnished deals to prominent occupiers which reduced their net outgo.
But the reduction of headline rents was not a popular phenomenon. With stable rental values and low vacancy levels, the office market in India will continue to be characterised by strong fundamentals in 2021.Flex is the future
The current market penetration of flex spaces in total office space stands at around 3.0%. In 2021, India is expected to witness deeper penetration of flex spaces as corporate occupiers continue to shift away from long-term capital-intensive commitments.
Flexible space solutions will be leveraged to satisfy temporary space needs, support a more mobile workforce and enter new geographies. In fact, driven by increased demand from large enterprises, we expect the size of the flex space market to reach nearly 39 million sq. ft in 2021.What to expect in 2021?
In 2020, a nationwide lockdown forced corporates to adopt work from home practices. This mass remote working experiment was relatively successful, which challenged traditional notions and prompted corporate occupiers to rethink workplace design and utilisation.
It is important to note that companies have started welcoming employees back to offices. The proportion of the workforce that has returned has increased in the past few months and this trend is expected to continue.
However, many companies might retain a hybrid work style combining remote working with office use. The post-COVID ‘new normal’ for offices will to be characterised by hybrid work models with an enhanced focus on sustainability, wellness and user experience.