Demand for office spaces, which took a massive hit at the start of the coronavirus pandemic, is showing signs of improvement. With the gradual reopening of the economy and an increasing preference for office working among corporates, the outlook for commercial property is improving, albeit at a slower pace than residential.
The latest data from property consultant Knight Frank India shows that from January to September, the workplace real estate market witnessed an incremental activity of 13% in transaction volume. New office completions increased 6% from the year-ago period. The report said that in the third quarter of calendar year 2021, total office transactions for the top eight markets reached 83% of the quarterly average of 2019.
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The report said that among the larger markets, Chennai, Bengaluru and Delhi-NCR (National Capital Region) recorded the highest recovery in Q3 2021, with transactions accounting for 123%, 112% and 93% of the quarterly average for 2019, respectively. . While these green shoots are welcome, a full recovery will be a long process.
“Net absorption of office space declined from 42 million square feet (msf) in FY12 to 20 msf in FY21 and the vacancy level increased from 11.5% in FY20 to 14% in FY21. Moreover, 20-25% of the workforce will opt for the work-from-home option, which should result in a 10-15% loss of office space,” analysts at Nirmal Bang Securities Ltd said in a recent report.
The domestic brokerage house said recovery of commercial real estate would take another three-four years.
“Mumbai, Bengaluru, Chennai and Pune will see a shortfall in supply as a percentage of stock and the vacancy level will remain down 10% in FY23E,” the report said.
Clearly, this has had an impact on the performance of Listed Real Estate Investment Trusts (REITs).
The Embassy Office Parks REIT has lost nearly 5 per cent in the past one year. Over the same period, Mindspace Business Park REIT stock was up 3%.
In contrast, the Nifty Realty Index has gained 136 per cent. To be sure, this sector index includes stocks of real estate companies that derive the majority of their revenue from the sale of residential property.
That said, a bright spot for office leasing is the strong demand outlook and strong recruitment trends in the Indian IT sector. This is seen as a positive for commercial real estate as IT companies are among the major demand drivers for offices in markets such as Bengaluru and Hyderabad. This segment is estimated to have contributed an average of 40% to the total office space demand in India over the years.
Analysts expect the Indian IT sector’s strong prospects to translate into a rapid revival of rentals for office space, which is a key sentiment driver for REITs.
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