COVID-19 impact | Pharma, medical health equipment companies may drive demand for commercial spaces

What is the future of pre-leased commercial spaces post COVID? While some experts feel commercial lease rentals may come under pressure and rents could decline by at least 20 percent, few believe that changing patterns among investors may boost demand for e-commerce, thereby pushing investments in the warehousing and logistics space.

Demand for commercial spaces from much-in-demand, life-saving sectors such as pharmaceuticals, medical health equipment and health nutrition companies may see a jump as they decide to increase their footprint.

“Demand for office space may not be affected in the long run. This is since corporates are looking positively at India from the long term perspective. Demand from certain sectors like technology companies, healthcare companies, outsourcing work in the form of Global In-house Centres (GICs) is expected to drive the office space demand in India. Certain corporates might look at flexibility in their contracts; this could be in the form of short-term contracts. Other trends could be opting for fitted out premises. Some of them might look at having remote locations. From overall space requirement perspective, corporates will look at de-densification of their office premises which might offset the reduction in demand as a result of Work from Home,” said Vishal Ahuja, India Head-Private Wealth Group at JLL.

Several pharma, healthcare and e-commerce companies are currently holding discussions about expanding their footprint across markets, brokers in the know told Moneycontrol.

Stressed commercial projects to see traction

Going forward, investors would also be looking at opportunities that are under stress.

“Investor interest continues for office and warehousing opportunities. They are scouting for deals with quality assets and good tenant profile. The general view is that there is stress as a result of COVID-19 and people who are over leveraged might end up selling part of their portfolio. This will result in availability of good assets. The supply might be generated from developers, investors and corporates wanting to divest their portfolio,” Ahuja said.

Investor expectations have gone up. Earlier, if the yields expected from office assets was 8 percent, it has now increased to around 8.5 percent. Yields for warehousing assets too has gone up from 8.5 percent to 9 percent earlier to 10 percent, he said.

There are others who think that stress in the commercial space will persist and that warehousing would continue to remain an exuberant asset class going forward.

Amit Goenka, founder MD and CEO of Nisus Finance, an alternative asset manager, is of the view that transactions that did not close pre COVID are likely not to close post COVID as well.

“Vacancies are bound to increase. Rents too are currently witnessing a downward trend – as much as 5 percent for the Grade A assets and as high as 20 percent for the Grade B assets. Several occupiers, especially international companies are re-calibrating their requirements,” he told Moneycontrol.

He, however, agreed that the yields will increase – current yields of 8 percent may become 9 percent going forward.

In case of warehousing, land prices have softened by 25 percent. Sellers too are coming back to the table to renegotiate with better prices.

“Demand for warehousing has increased but with lower rentals. Warehousing will remain an exuberant asset class post COVID-19. Land availability may get better post COVID as people would have to monetise their land parcels even at a 25 percent discount,” he said.

Several e-commerce space occupiers have already started looking at lower rents. Rents in some markets that had peaked at 24 per sq ft have now dropped to Rs 18 per sq ft during COVID because inventory turn is lower. “The cost of holding has gone up which against has been offset by the cost of real estate,” he explained.

 Pressure on commercial rentals may persist

Commercial lease rentals may come under pressure and rents could see a decline of at least 20 percent to 30 percent going forward, say commercial property experts.

Economic meltdown during 2008 financial crisis had brought down the rental values to the extent of 40 percent to 50 percent in the commercial office space segment. If the lockdown continues the highest number of vacant supply will be in NCR and MMR, said Pankaj Kapoor of Liases Foras.

Before the lockdown began, about 86 million sq ft or 12 percent of office space in the top eight Indian cities was vacant, of which 18 million sq ft was in MMR.

“This may increase to 32 percent if the lockdown continues,” he said.

In case the effects of the lockdown prolong till September, the vacant office space in these eight cities could reach as high as 225 million sq ft, the research firm has said in its report.

“Every week into the lockdown will impact the revenues of IT companies. The companies are likely to reduce their expenditure by 25 percent to 30 percent which is likely to induce pay cuts and job cuts. This will have repercussions on new absorptions of commercial office space as well as increase in vacancy levels. Reduction in employee cost will directly impact the demand of office real estate as well as lease rates,” said Kapoor.

As per estimates by Liases Foras, the total office inventory in the top eight cities across the country is 699 mn sq ft of which 613 mn sq ft is currently occupied and 86 million sq ft is vacant.

The Liases Foras analysis said vacant office spaces in the MMR may  increase from 18 percent at present to as high as 41 percent by September if the lockdown situation persists. In Delhi-NCR, vacancy may increase from 31 percent to 56 percent by September and in Bengaluru, it may increase from 9 percent to 36 percent. –Moneycontrol

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