COVID-19 outbreak: India’s office sector likely to see lower gross absorption in 2020

[ecis2016.org] The 21-day lockdown announced by the government in the wake of the Coronavirus outbreak in India might impact absorption rate in commercial real estate by way of affecting the decision-making process, says a report by Colliers India

The 21-day lockdown announced by the government in the wake of the Coronavirus outbreak in India might impact absorption rate in commercial real estate by way of affecting the decision-making process, says a report by Colliers India. The government has announced a lockdown nationwide until April 15, 2020, due to the outbreak.

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According to the report, titled ‘Insights & Recommendations for Indian Real Estate in Light of Spread of COVID19’, the contagion would also provide sector stakeholders with various opportunities.

Commercial real estate to be more lucrative

“We recommend investors to capitalise on the situation and focus on commercial real estate assets as their cap rates are likely to decline in line with the falling 10-year government bond yields. This should place commercial assets in a more lucrative position, possibly generating higher returns for investors,” says Sankey Prasad, managing director and chairman at Colliers International India.

“We also recommend investors to scout for assets in data centres and warehousing and logistics, given strong potential in terms of cloud infrastructure, and robust domestic demand,” Prasad adds.

The report also points out that the occupiers are likely to delay leasing decisions by a quarter, with some even taking a watch-and-watch stance. If the current lockdown extends beyond April 15, 2020, decision-making could be delayed for up to two quarters.

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“We believe that post the initial six months, flexible workspaces, especially those focusing on adequate wellness and hygiene factors should see higher inquiries from occupiers,” says Megha Maan, senior associate director-research, Colliers International India.

Key highlights

Near-term impact

According to the report, India’s office sector, which has seen a robust run over the last three years, is likely to see lower gross absorption of about 45-50 million sq ft in 2020, across the top seven cities, stemming from delays in decision-making. In light of that, the report recommends that occupiers must focus on building data capabilities to enable remote working.

If the outbreak in India is not contained sooner, and business operations suffer, occupiers might initiate renegotiation of leases or ask for some relief from developers/landlords over elements such as lock-in amount, fixed deposit, to cope with likely increased financial pressure, says the report.

Occupancy levels in flexible workspaces will stay muted in March and April 2020, as the risk exposure is higher than in traditional offices, it adds.

Long-term impact of COVID-19

The current scenario may be a precursor to a shift in the idea of workplaces. Keeping that in mind occupiers would evaluate their density plan and seating arrangements in workplaces, keeping safety and health as key considerations. Currently, Indian workplaces are typically about 60-80 sq ft per seat.

Occupiers, says the report, should consider splitting up offices as a hub-and-spoke-model, into two or more locations in a city, to minimise future risk as well as reduce dependency on one office. Under a hub-and-spoke model, occupiers can have one main office, and multiple smaller offices across the city.

“We anticipate cash flows of small and medium enterprises to be hampered, as they overcome a prolonged period of low productivity. Cost containment could emerge as a key factor in expansion plans of occupiers. Hence, occupiers should scout for cost-effective solutions, which could include flexible workspace which involves lesser upfront capital and low capital expenses,” says the report.

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Properties that place importance on wellness and sustainability will see greater demand in the coming years.

Commercial real estate post Coronavirus

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