Commercial real estate holds ground for now

Experts see valuations rising even as some retail tenants default

Commercial real estate has been notable for big-ticket deals. Like in September, Blackstone and partners snapped up a business park owned by Café Coffee Day for around ~2,800 crore. But transactions that size are vanishing due to a troubled financial system, and pandemic-related lockdowns.

While there are rare instances of smaller deals happening in prime locations, the future indicates office space rentals holding good with defaults to come from retail tenants.

Since March 25, realty advisory Anarock has signed in principle agreements for sales of over ~250 crore of real estate — a little over 12 per cent accounted for commercial property.

Jitu Virwani, chairman of Embassy Group, a listed REIT and the largest landlord after DLF in the country, said that for April, he saw rent collections at 96 per cent. “Some retail tenants have been hit hard. But we see the future of commercial realty as okay once the markets open up, given that most back-offices will be needing larger spaces.” He referred to companies such as JP Morgan and Goldman Sachs, whose international protocols for safety mandate more space for each employee. “Retailers will need a lot assistance.”

Officials with Blackstone, the largest commercial landlord in India, said it was too early for a view. Others claimed firm footing. Irfan Razack, chairman of the Prestige Group that operates malls and hotels, said on a webinar call that “92 per cent of office tenants have paid rent for April”.

He said vacancies for A-grade properties were limited, with occupancy as high as 95 per cent. “New inventory will take at least five years to come into the market,” he said.

According to Anarock, as of end 2019, average occupancy of A-grade office space was close to 86 per cent.

Gulam Zia, executive director with Knight Frank India, said: “In a regional business like real estate, there’s hardly a surplus of top-notch office space that is lying empty in Mumbai.”

The other factor supporting rentals is that a majority of the tenants are IT firms and they are using large data rooms and servers, even if when employees are working from home. That being said, demand is obviously not accelerating. “But you won't see buildings emptying by the dozens either,” Kamal Khetan, chairman of Sunteck Realty, said. “In the next six months, people will go to malls and hotels. Retail rentals may or not come down, but they won't spike as highly as they did before.”

A head of a international private equity firm said that at a macro-level, while interest rates go down, real estate valuations go up even if rentals stay flat or dip marginally. “Imagine an IT employee who earns ~10-20 lakh a year, and is suddenly asked to go work from home. His access to cafés, computers, telephones, printers, high-speed broadband is all then his own cost. And, you could start to see a shift in productivity, not to mention an inherent security risk.”

In his view co-working spaces will take the biggest hit because start-ups will not be able to afford more seats.

Virwani, however, said co-working offices with glasswork box-type cubicles are actually cleaner and safer, as they can be locked up.

Seven out of 10 request for proposals (RFPS) for space for approximately a million and and a half square feet across the nation have been put on hold, thanks to the pandemic, said

Samir Jasuja, founder of Propequity. He said that while office space rentals are holding good, retail customers in office spaces are not paying rents. As a result, he said, in the future "prices won't go up for rentals."

"Despite that, the deeper impact on the sector will be linked to economic impact on markets such as the US, because US firms are major office space consumers in India — almost 45 per cent," said Anuj Puri, chairman of Anarock. "There is also a possibility that office space demand may not really see major decline as rents are not calibrated on the basis of how many employees use it, but on the space occupied in a certain location."

The bigger worry is how to start construction as rules have changed. “You need to leave steel untouched for at least 14 days according to new norms,” Virwani said. “Expect delays for at least six months for new work to begin.” Razack agreed, adding construction wouldn't start before Diwali.