How is COVID-19 impacting rental returns in commercial real estate?

[ecis2016.org] While office space leasing is expected to grow again in the medium term, mall operators will be operating at loss in the near future

The Coronavirus pandemic has dampened the sentiments of commercial real estate investors. With COVID-19 forcing lockdowns in major cities, all commercial outlets, including co-working spaces, retail complexes, shopping malls and office floors, were forced to halt operations. The government even asked landlords to defer or forfeit the rent for those 60-90 days, which impacted the landlords further.

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While the two phases of unlocking have reopened most of the businesses, many companies have allowed remote working for next few months, as a precautionary measure, or are operating at reduced strength, which means they can do away with extra office space. Similarly, footfalls in malls are at their lowest and co-working spaces are still trying to factor-in the cost of safety measures that are essential for social distancing.

[ecis2016.org] Impact of Coronavirus on Indian real estate

COVID-19 impact on rentals from office spaces

A sizeable share of office-goers were working from home, since the lockdown began. It is likely that only a part of this workforce may ever return to office, full-time. A number of companies, including IT giants such as Infosys, TCS and Wipro, are planning to allow remote working even when COVID-19 subsides and a few may allow staggered shifts and timings. As per industry estimates, if such policies take shape, companies could free-up 30%-50% of the real estate that is occupied, at present.

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This will impact landlords adversely, as corporate houses will then want to get rid of additional lease cost, in cities where the rents are expensive. The lack of liquidity in the market, could also force companies to cut down on total operational costs.

Companies that are operating in special economic zones (SEZs) may vacate the space, ultimately bringing more supply into the market, which may further drive down the overall rentals.

According to a report by Colliers International, office space leasing is down by 36% annually, in the first six months of 2020. Hyderabad and Chennai have witnessed a fall in office space leasing by 62% and 32% annually, respectively, while Delhi NCR saw a 27% drop. Mumbai saw a fall of 53%, as per the report. However, the good news is that large tech and e-commerce companies, are picking up large spaces across tech hubs in India.

“The COVID-19 pandemic is indeed an unprecedented time. Nevertheless, the measures announced by the Indian government, will put the economy on the path to recovery. Going forward, we can expect further consolidation in the commercial sector. However, office spaces will continue to be an attractive choice for investors, due to its resilience,” says Sandeep Agarwal, CFO, Pioneer Urban Land and Infrastructure Ltd.

COVID-19 impact on rentals from retail spaces

If industry experts are to be believed, the impact of the lockdown was most visible on the rental income of retail spaces. The enforced closure of malls and shopping complexes, has impacted the revenue of tenants and a part of this has spilt over to the landlord’s side. With consumption showing subdued demand and buying moving online, there is little scope of immediate improvement, when it comes to this segment.

Now, as malls have started opening gradually, mall operators and retailers are renegotiating lease terms. A number of mall operators are agreeing to let go of 50%-100% of the rent during the lockdown period.

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For now, people are preferring to shop online or at local retailers, points out Anand Kulkarni, assistant VP and associate head (corporate ratings), ICRA, a credit rating agency. “Hence, footfalls may be impacted in the near future. Mall operators will have to take measures, to fund the cash flow mismatches which are expected in the current year,” he adds.

Ravish Kapoor, managing director, Elan Group, maintains that “In the retail sector, COVID-19 may reinvigorate the concept of high-street retail and mixed-use realty. High-street retail has been able to adapt, in response to changing consumer behaviour, over the years. The focus on an omni-channel strategy and leveraging cutting-edge technology, will further aid it in forging long-lasting engagement with consumers,” says Kapoor.

However, ICRA said that it expects the cash flows of malls in this financial year to be significantly impacted, due to the discounts offered to the tenants by the operators, under minimum guarantee rentals.

COVID-19 impact on rentals from warehousing

As the industry is pins its hopes on the e-commerce giants, for revival and demand, the logistics and warehousing segments could be the biggest gainers in the commercial real estate sector. A Savills study revised the projection for warehousing and logistics leasing to 30 million sq ft in 2020, from the previous estimate of 40 million sq ft due to construction delays owing to the pandemic. Nevertheless, the warehousing segment is expecting a quick revival in demand, due to projected higher volumes in e-commerce and the possibility of several manufacturing businesses moving to India.

Interestingly, there are a number of commercial real estate brands that are looking to develop a warehousing portfolio, due to the anticipated demand in the sector. For example, after the success of its Palava Industrial Park, a 170-acre warehousing space, the Lodha Group is working on the approval for a second park, of 200 acres. Similarly, a subsidiary of the Hiranandani Group, Green Base, has tied up with global investment firm Blackstone, to build warehouses, logistics and industrial parks in Pune, West Bengal and Chennai. The companies will invest around Rs 2,500 crores over the next four years, to develop 12 million sq ft of warehousing.

“Warehousing is one of the segments of the real estate sector that is likely to benefit following the COVID-19 pandemic. As supply chains were clogged, a lot of players were asking for spaces across the country. There is a possibility of unsold/ idle inventory, old manufacturing units and shopping centres being converted into warehousing space,” says Shishir Baijal, chairman and managing director, Knight Frank India.

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