4 significant trends emerging amid Covid-19 in Commercial Real Estate

June 1, 2020: Scenario for the Indian commercial real estate looked promising in 2019, with a fresh supply of over 50 million sq. ft. and a net absorption that hovered north of 45 million sq. ft – primarily driven by IT/ ITeS, BFSI, consulting & co-working spaces. Total vacancy in the upcoming markets such as Bangalore, Chennai & Pune, was in single digit, further highlighting the robustness of the Indian office real estate.

Despite visible cracks in the Indian economy, the corporate world was bullish on India’s long-term growth potential. An unbelievable amount of institutional money was poured into the office real estate.

The bullish run, however, did not last long. As economic activities got disrupted following a nationwide lockdown, the domino effect started to emerge in an otherwise buoyant office real estate. Due to uncertainty & paranoia, and realtors trying out the digital way, aggregate sales & leasing activities have plunged.

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Only those projects will start shortly, which are in the last miles of completion (6 months -1 year) that can foresee light at the end of the tunnel.

It will take some time to arrest pandemics and the ensuing economic slowdown. Meanwhile, some new concepts will emerge which will entail a wider structural impact.

Rental Revisits

As most of the business activities have paused, organizations will ask for rental concessions or deferments with their landlords. This is a common denominator across the world. Likewise, in the next 2- 3 months, many businesses will ask for rental revisits. Generally, rents constitute 5-9% of the topline or revenues. There will be re-negotiation on rentals which might be inconclusive in many cases, thereby leading to exits. The industry might see a higher number of structured solutions for continuity and exits.

Refurbishments

New regulations are expected with respect to office space utilization, layout & safety standards. In the light of social distancing & a healthier working environment, mass recruiters will be mandated to allot larger space. Since the existing office spaces cannot be expanded, organizations will need to redesign & reconfigure their existing space to ensure hygiene and safety standards.

New Products in Market

As a repercussion of to rise in exits & decentralization, demand for quality yet affordable products will also rise. As a response to changing dynamics, investor activities will also steadily grow. The rise in investments will also be rooted in the fact that many investors are looking for risk mitigated assets that can offer good ROIs.

As market dynamics will evolve, so will be the developer’s offerings. Developers are expected to give additional benefits such as re-doing the floor plan.

The Weakening of Rupee & NRI Interest

NRIs will continue to deepen their foothold in commercial Indian real estate. In the past 12 months, the value of rupee has depreciated by more than 10%. Although this is not a very welcome sign for the economy, which is already marred with a widening fiscal deficit – this will be a shot in the arm for NRI buyers. Amidst global contingencies, many NRIs are looking for safer & smarter investment options. Commercial real estate with recurring rental income & smarter mid-term appreciation potential will fit into the requirements of the expatriate class. Affluent NRIs will even look out for portfolio investments.

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