Commercial Real Estate Sector Will Continue To Face Pressure in Near Term: Report
| Published: Wednesday, June 16, 2021, 7:27 pm [IST]
According to a report, the commercial real estate sector will continue to come under pressure in the short term due to the disruption in the office and retail rental segments caused by the COVID-19 pandemic. With the second wave peaking in the first quarter of FY22, the sector is expected to face similar challenges to the previous fiscal year, Icra Ratings said in the report.
While the outlook for the retail rental segment is closely tied to the rebound in retail sales and consumer spending among the urban population, the pickup in demand in the office rental segment is being influenced by several factors as companies assess the challenges and opportunities presented by the pandemic at their real level, estate resource planning, added her. “Although cash flows were largely unaffected in FY21, we see increasing vacancy in the valued portfolio as the pandemic has pushed tenants to postpone new leases as available inventory builds in line with planned completions,” said Icra Group Head and Senior Vice President, Corporate Ratings, Shubham Jain told reporters at a virtual press conference.
The delay in closing a new lease is due to several factors, including restrictions on international travel and postponing decision-making until there is clarity on whether employees will be returning to offices on earlier numbers, he added. To some extent, companies could also evaluate the potential for them to reduce their real estate footprint by implementing hybrid work models, including home office and flexible sitting, he noted. “While the factors that have historically supported the high uptake of office space in the country – including an abundant and cost-competitive talent pool – remain intact, evolving labor practices in response to the pandemic may at best be a temporary postponement of rental decisions, or worst Case a permanent reduction in the demand for space, “said Jain.
Until the impact of the pandemic on demand trends becomes clear in the medium term, the report says portfolios with moderate leverage and a low percentage of assets under construction will be better positioned to cope with short-term challenges such as a decline in occupancy or less-than-expected increases the rental prices. Still, a persistent gap in demand and supply, which can translate into rental price reductions or occupancy in the broader market, will be an important monitoring criterion, she added. Icra said cash flow pressures on the retail leasing segment are more evident in the short term as state lockdowns and mall operations restrictions affect tenant income and are reflected in rental concessions by mall operators.
As retail stores eventually recover from the effects of the pandemic, rental collections are also expected to return to previous levels, the report said. However, the timelines for such a recovery will depend on the pace of vaccinations in the targeted segment of shopping malls, as well as the recovery in consumer sentiment following the negative impact of the second wave on disposable incomes. “The first wave in FY21 led to a decrease in the net operating income of the shopping centers by up to 50 percent. However, the recovery in operating metrics in the second half of the last fiscal year would have been encouraging for the industry.
“The prospects for such a steep recovery in FY22 could be dampened by the income shock caused by the second wave due to the associated health care costs of many families,” Jain noted. In addition, the possibility of subsequent waves will weigh on the authorities’ decisions to relax restrictions and return visitors for non-essential shopping and leisure activities.
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First publication of the story: Wednesday, June 16, 2021, 7:27 pm [IST]