Commercial real estate will continue to face significant pressure in near term: ICRA – ET RealEstate

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NEW DELHI: The commercial real estate sector will continue to face significant pressure in the near term owing to the continuing impact of the Covid-19 pandemic on both the office and retail leasing segments, according to ICRA Ratings.

With the second wave peaking in Q1 of FY22, the sector is expected to confront similar challenges as in FY21. While the retail leasing segment prospects are intricately linked to the recovery in retail sales and discretionary consumption spending by the urban population, demand recovery in office leasing segment is influenced by multiple factors as corporate occupiers evaluate the challenges and opportunities created by the pandemic on their real estate resource planning.

Shubham Jain, group head & senior vice president, Corporate Ratings, ICRA, said, “Though cash flows remained materially unimpacted in FY21, we are seeing increasing vacancy levels in the rated portfolio as the pandemic has resulted in deferment of new leasing transactions by tenants while the available inventory builds up in line with scheduled completions.”

The delay in conclusion of new leasing is on account of multiple factors including restrictions on international travel and deferment of decision making until there is clarity on employees returning to offices at earlier numbers.

“To some extent, corporates could also be evaluating the potential for them to reduce their real estate footprint through implementation of hybrid work models including work-from-home, flexi-seating, etc. While the factors that have supported the high level of absorption of office space in the country in the past โ€“ viz, abundant and cost competitive talent pool โ€“ remain intact, the evolving work practices in response to the pandemic may create, at best, a temporary deferment of leasing decisions or, in the worst case, a permanent reduction in the demand for real estate space,” he said.

The cash flow pressures on the retail leasing segment are more evident in the near term as state level lockdowns and restrictions on mall operations impact the tenantsโ€™ revenues and will translate into rent concessions being granted by mall operators.

As retail operations eventually recover from the impact of the pandemic, the rental collections are also expected to revert to the earlier levels. Nonetheless, the timelines for such recovery will depend on the pace of vaccinations in the target consumer segment for retail malls, as well as the revival in consumer sentiments following the adverse impact that the second wave had on disposable incomes.

The rising share of retail sales cornered by e-commerce marketplaces will also have an impact on the trading values of traditional retailers in malls, thus impacting the business profile of the mall operators as well.

“The first wave had resulted in reduction in net operating income of retail malls by up to 50% in FY21. However, the recovery in operating metrics witnessed in the second half of last fiscal would have been heartening for the industry. The prospects for such a steep recovery in FY22 could be dampened by the income shock created by the second wave due to the associated healthcare costs that many families incurred. Over the medium term, the industry is likely to see a shift towards more experience based outlets rather than pure retail stores as malls combat the rising share of e-commerce in overall retail,” Jain added.

The credit outlook for the retail leasing segment remains negative due to the high level of cash flow disruption in Q1 and the rest of the year, particularly in the absence of regulatory measures such as moratorium on debt servicing, which had supported liquidity in FY21.

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Work-from-home trend may significantly damage office space market: Ind-Ra – ET RealEstate

MUMBAI: Negative demand created by the work-from-home culture along with reduction in fresh leasing activities due to a weaker economy can easily shave 40 per cent off annual demand over the next few years, according to India Ratings and Research (Ind-Ra).

The agency said this can result in over 500 basis points increase in vacancy levels over FY21 to FY23. “The impact on upcoming office space providers is likely to be particularly sharp as these may struggle to let out their upcoming properties.”

Nearly 83 per cent of employees surveyed recently by Accenture favoured a hybrid work model with the ability to work remotely 25 to 75 per cent of time.

Ind-Ra said such a transition to working remotely can seriously hamper office real estate demand as it may allow companies to use a hot desking policy where the same desk may be shared by a number of employees who report to work on different days.

If 2.5 per cent of overall employees are asked to report to work on alternate days and use the hot desking policy, it may result in a net 1.25 per cent reduction in office space required in a country.

On a base of 635 million square feet of office space occupied in top eight cities of India at FYE20, said Ind-Ra, it will result in a negative demand of 7.9 million square feet which is 21 per cent of the average annual demand seen during FY19 to FY20.

“A larger impact of hot desking might shave off several years’ of demand in the short run and create significant hardships for office real estate providers.”

Besides, a number of international companies have announced hybrid work models where the employees will need to report to office only on a few days of the week. Ind-ra said it can be easy to infer that the space that may be subject to hot desking model may be a lot more than 2.5 per cent as envisaged.

Ind-Ra said occupancy at a large real estate investment trust (REIT) focusing on office portfolio declined to 86.8 per cent in 4Q FY21 from 92.2 per cent in 1Q FY21.

Occupancy at another listed REIT declined to 81.8 per cent in 4Q FY21 from 87.1 per cent in 2Q FY21. Occupancies at other listed REITs and companies also declined by around 500 basis points over the last four quarters, said Ind-Ra.

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Prime offices’ rental slips 8% in Bengaluru; Mumbai records 6.2% drop in Q1 2021 – ET RealEstate

NEW DELHI: Rentals of prime offices in Bengaluru and Mumbai fell 8 per cent and 6.2 per cent, respectively, during January-March 2021 as compared to the year-ago period, according to a Knight Frank report.

In its Asia-Pacific Prime Office Rental Index Q1, 2021 report, the consultant said the prime office rents in the national capital region (Delhi-NCR) declined by only 1 per cent during January-March this year as against the same period of 2020.

“Despite there being uncertainty around the performance of India’s office sector, Bengaluru, NCR and Mumbai markets are expected to remain stable in rental values over the next 12-months,” Knight Frank said.

For Q1 2021, Knight Frank’s Asia Pacific Prime Office Rental Index fell 1.2 per cent quarter-on-quarter, led by large office markets such as Tokyo, Hong Kong, and Bengaluru, which recorded rental decline between 3 per cent to 2.8 per cent during the same period.

On an annual basis, the overall index was down 5.5 per cent year-on-year.

Shishir Baijal, Chairman and Managing Director of Knight Frank India, said, “The second wave of pandemic and associated regional lockdowns have temporarily delayed occupiers’ office re-occupancy plans”.

However, he said, control on infection case count with graded regional lockdowns and progress on vaccination drive will act as a market stabiliser in near future.

“Given the strong fundamentals of the India office market, despite the near-term uncertainty, occupiers will positively react to any improvement in the pandemic scenario in the country,” Baijal said.

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YieldAsset aims to have Rs 100 crore in assets by next quarter – ET RealEstate

YieldAsset Real Estate Tech Pvt Ltd, a proptech startup, which enables fractional ownership in institutional-grade Commercial Real Estate (CRE) aims to have Rs 100 crore worth of assets under management (AUM) by the end of September quarter.

YieldAsset has already listed two assets of Grade โ€˜Aโ€™ office space in Mumbai and is in the final stages of signing few more commercial assets in prime locations in Mumbai, Bengaluru and Pune.

โ€œWe are looking forward to scaling up our offerings in the coming months. The Grade-A office real estate remains a preferred asset class for investors to add rental income portfolio owing to the asset’s robust fundamentals and resilience. By bringing investors and asset owners in line on a tech-enabled platform, YieldAsset offers the best opportunities to non-institutional investors to participate in these asset classes. YieldAsset is also entering into a strategic partnership with few leading Wealth Management firms to offer fractional ownership of commercial properties to investors associated with them. Going forward, the company will also be looking at other asset classes such as warehouses, data centers, student housing, industrial assets, amongst others.โ€ said Rajesh Binner, Founder, YieldAsset.

YieldAsset offers unique investment opportunities in the CRE space by fractionalizing CRE and offering it on an easy-to-use online platform.

Riaz Maniyar, Co-founder, YieldAsset, said “Investment in rental yielding commercial real estate has generated great wealth to investors. However, it has been available only to those with the right connections and deep pockets. This asset class and its benefits have been out of reach for most of the people. Fractional ownership is the future of the real estate market as it addresses an important issue with commercial property – a high entry barrier of large capital investment. It also enables investors to earn monthly rent from fractional ownership of these assets and build long term wealth as property price increases. We are democratizing investment in commercial real estate that has been a purview of ultra-HNIs and institutions. We follow a rigorous vetting process before onboarding any property.โ€

As per a recent report by Knight Frank, private equity investment in real estate jumped over 16-fold in January-March 2021 to $3.24 billion, which was largely institutional. The investment stood at a mere $199 million in Q1 of the 2020 calendar year.

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