India Ratings Sees A Worrying Sign For Evergreen Commercial Real Estate

Beth McCandry

When the pandemic hit the Indian coast last year, stalling economic activity and prompting work from home, it posed a threat to an evergreen market – commercial real estate. These fears have come true.

According to India Ratings and Research Ltd. the occupancy rate of a large real estate investment trust with a focus on office properties fell to 86.8% in the quarter to March from 92.2% in the previous year. The figures do not take into account the effects of the acquisitions.

At another listed REIT, it fell from 87.1% in September to 81.8% in March. For other such trusts and commercial real estate companies, occupancy has declined about half a percentage point over the past four quarters.

India’s commercial real estate flourished before the pandemic, even if the apartments suffered from an overnight cash ban, tough real estate regulation bill and a credit crunch. Investors are counting on the demand for office space, which is being driven by IT companies, start-ups and data centers. However, the slow-down corner could not escape the disruption of the pandemic. And the decline in occupancy came even before a devastating second wave of the virus.

The trend is sending “worrying signals” for the commercial property market, India Ratings said, reiterating its negative outlook on providers of office space under construction.

In terms of portfolio size, Embassy Office Parks REIT is India’s largest, followed by Mindspace Business Parks and Brookfields Trusts. Of course, India Ratings did not identify any REITs or companies in its report.

BloombergQuint awaits responses to inquiries by email to Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield REIT, DLF Ltd., Oberoi Realty Ltd., Brigade Enterprises Ltd., Phoenix Mills and Macrotech Developers Ltd.

Private office providers rated by India Ratings have generally shown deterioration in occupancy and new leases, the report said.

  • A Hyderabad-based developer building 8.12 lakh square feet (developer’s portion) of office space sales decreased to 9,500 square feet in FY21. That compares to 1.43 lakh sqft in FY20.

  • An office space provider based in Navi Mumbai with 2.08 million sq. Feet of lettable space recorded a decrease in occupancy to 86% in FY21 from almost 100% in FY20.

  • Another project developer based in Hyderabad, who completed 1.25 million sq. Feet of office space a few years ago, recorded stagnating occupancy of around 76% in FY21 and, contrary to the expectation of full occupancy, could not find any new tenants.

  • A Mumbai-based office space provider with 0.8 million sq. Feet of lettable office space saw occupancy decrease by around 10%, mainly because they bought additional space from a seller who decided to move to new premises.

  • The occupancy rate of a tier 1 office space provider based in Pune with 0.87 million sq. Feet of lettable space decreased in FY21 from almost 100% in FY20 to 74%, as a large IT company vacated its premises.

Remote work stroke

India Ratings listed remote working as one of the key factors affecting occupancy during the pandemic. And its effect could be lasting.

“A negative demand caused by the work-from-home culture, together with a decline in new letting activities due to a weaker economy, could easily reduce annual demand by 40% over the next few years and lead to an increase in vacancy of more than 500 basis points Levels above FY21-FY23, “it said.

Moving to remote working can enable companies to use hot desking – the same desk could be shared by many employees who come to work on different days, it said.

If 2.5% of total employees are asked to report to work on other days under this policy, it could result in a net 1.25% reduction in office space required in the country, the report said. On a basis of 635 million square feet of office space in India’s eight largest cities in FY20, that would translate into negative demand of 7.9 million square feet, it said. That is 21% of the average annual demand in FY19-FY20.

According to India Ratings, hot desking can reduce demand for several years in the short term.