India Ratings and Research (Ind-Ra) notes worrying signals from the commercial real estate market and reiterates its Negative Outlook on under construction office space providers.

Listed Players Show Significant Decline in Occupancy: Ind-Ra is concerned that the sharp decline in occupancy levels reported by some of the major listed real estate investment trusts (REITs) and office real estate companies in FY21 could be a result of a weaker economy and the work-from-home phenomenon. Excluding the impact of acquisitions, occupancy at a large REIT focusing on office portfolio declined to 86.8% in 4QFY21 from 92.2% in 1QFY21. Occupancy at another listed REIT declined to 81.8% in 4QFY21 from 87.1% in 2QFY21. Occupancies at other listed REITs and companies also declined by around 500bp over the last four quarters.

Figure 1
Major Listed Real Estate Entities Report Significant Decline in Occupancy Levels

Occupancy (msf)

1Q21

1Q21

3Q21

4Q21

 

Occupancy (msft)

1Q21

2Q21

3Q21

4Q21

REIT 1

 

 

 

 

 

Company 1

 

 

 

 

Total completed area

26.2

26.2

32.3

32.3

 

Total completed area

26.4

29.4

29.5

NA

Original completed area

26.2

26.2

26.2

26.2

 

Occupied area

24.8

27.3

26.6

NA

Additional acquisition

0.0

0.0

6.1

6.1

 

% occupancy

93.9

93.0

90.0

NA

Occupied area: Total

24.2

24.0

29.3

28.7

 

Company 2

 

 

 

 

Occupied area: Original

24.2

24.0

23.3

22.7

 

Total completed area

3.5

3.5

3.5

7.2

Occupied area: Acquired

0.0

0.0

6.0

6.0

 

Occupied area

2.4

2.5

2.5

4.6

% Occupancy: Total

92.2

91.7

90.6

88.9

 

% occupancy

69.2

70.6

70.9

64.1

% Occupancy: Original

92.2

91.7

88.9

86.8

 

Company 3

 

 

 

 

% Occupancy: Acquired

NA

NA

97.8

97.8

 

Total completed area

1.33

1.33

1.58

1.58

REIT 2

 

 

 

 

 

Occupied area

 1.09

 1.02

 1.07

 1.02

Total completed area

NA

23.9

23.9

23.9

 

% occupancy

82.0

76.7

67.7

64.6

Occupied area

NA

20.8

20.4

19.6

 

Company 4

 

 

 

 

% occupancy

NA

87.1

85.3

81.8

 

Total completed area

 1.09

 1.10

 1.10

 1.09

REIT 3

 

 

 

 

 

Occupied area

 0.89

 0.87

 0.89

 0.90

Total completed area

NA

NA

NA

10.3

 

% occupancy

81.4

79.2

81.5

82.8

Occupied area

NA

NA

NA

9.4

 

 

 

 

 

 

Occupancy

95a

NA

91.0

91.0

 

 

 

 

 

 

a December 2019 occupancy of 96%. 1QFY21 occupancy is estimated; msf: million square feet
Source: Bombay Stock Exchange, Ind-Ra

 

Ind-Ra Rated Private Players Showing General Decline in Occupancy and Fresh Leasing: The private office space providers rated by Ind-Ra have generally shown deterioration in office occupancy and fresh leasing activities. Following are some examples:

·       A Hyderabad-based developer building office space with a saleable area of 812,493 sf (developer’s share) saw its sales declining to 9,500sf in FY21 (FY20: 142,903sf).

·       A Navi Mumbai-based office space provider with 2.08msf of leasable office space saw its occupancy declining to 86% by FYE21 from nearly 100% at FYE20.

·       Another Hyderabad-based developer who completed 1.25msf of office space, a few years ago, saw its occupancy stagnating at about 76% over FY21 and was unable to find any new tenants versus its expectation of fully letting out the property.

·       A Mumbai-based office space provider with 0.8msf of leasable office space saw its occupancy declining by around 10%, largely because it purchased additional space from a seller, who decided to move into different premises after the sale.

·       A Pune based tier-1 office space provider with 0.87msf of leasable office space saw its occupancy declining to 74% at FYE21 from near 100% at FYE20, as a large IT company vacated its premises.

Though Unaudited, Data from Real Estate Consultancies does not Suggest any Such Decline: While the data from the listed REITs and companies rated by Ind-Ra clearly is raising concerns, the data provided from real estate consultancies projects a sanguine picture. According to Liases Foras, office vacancy levels in the top eight cities in India remained largely flat at 15.0% from FYE20 to FYE21. Vacancy at National Capital Region (4QFY21: 24.4%; 4QFY20: 23.5%, ), Mumbai Metropolitan Region (18.9%; 18.6%), Pune (9.1%; 8.1%) and Hyderabad (6.4%; 5.8%) increased only marginally. On the other hand, vacancies at Bangalore (4QFY21: 6.9%; 4QFY20: 7.9%,), Chennai (5.8%; 5.9%), Kolkata (26.4%; 29.4%) and Ahmedabad (46.7%; 52.6%), declined somewhat. According to JLL India Private Limited, vacancy level at the top seven Indian cities increased only marginally to 14.9% by 4QFY21 from 13.1% in 1QFY21.

Ind-Ra notes the apparent discrepancy in the private data shared by the consultancies and the data available from listed REITs/companies and from private companies rated by the agency. Ind-Ra is monitoring the situation closely to get better clarity on the office real estate space. The data in the private real estate space is not always accurate.

Work from Home May Significantly Damage Office Space Market:
The agency believes that the negative demand created by the work-of-home culture, along with a reduction in fresh leasing activities due to a weaker economy or work from home trends, can easily shave 40% off the annual demand over the next few years and result in over 500bp increase in vacancy levels over FY21-FY23. The impact on upcoming office space providers is likely to be particularly sharp as these may struggle to let out their upcoming properties.

According to a report from Accenture (The Future of Work, May 2021), 83% of employees surveyed favoured a hybrid work model, with the ability to work remotely 25%-75% of time. Such a transition to working remotely can seriously hamper the office real estate demand, in Ind-Ra’s opinion, as it may allow the 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. Just as an illustration, if we assume that 2.5% of the 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% reduction in the office space required in the country. On a base of 635msf of office space occupied in the top eight cities of India at FYE20, it would result in a negative demand of 7.9msf, which is 21% of the average annual demand seen during FY19-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.

Several Companies Adopting Hybrid Work Model:
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. 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% envisaged above.

·       According to The Guardian (1 June 2021), NatWest Group is preparing for a future where just 13% of staff will work from the office full-time. About 8,300 staff will be expected to commute to the lender’s offices and branches daily, leaving the rest of its 64,000 employees to split their time between home and office, even after the government’s work-at-home orders are lifted.

·       According to The Guardian (7 April 2021), the accountancy firm PricewaterhouseCoopers Private Limited said its flexible working policy would allow its 22,000 staff to work from home about half the time.

·       Grant Thornton, the UK’s sixth largest accountancy firm, found that nine in 10 of its staff wanted to work most of the week from home. The company reduced the size of its Manchester office last year.

·       Representatives for HSBC’s UK call centre staff are in discussions with the bank concerning up to 1,200 workers making a permanent switch to remote working.

·       Jamie Dimon, JP Morgan’s chief executive, said 10% of the US investment bank’s 255,000 employees may work from home full-time. Other staff will continue to work at home for some of the time.

·       Global market research firm Forrester Research Inc predicts that 70% of US and European companies will pivot to a hybrid work model post-pandemic.

·       According to Indian Express (6 May 2021), Google LLC’s chief executive officer Sundar Pichai said in an email to its employees, “We’ll move to a hybrid work week where most Googlers spend approximately three days in the office and two days wherever they work best”. He also added that 20% of the employees will work from home permanently.

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Analyst Names

  • Abhishek Shukla

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    Monil Furia

    Analyst
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    Vikas Anand

    Senior Analyst
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