Home >Companies >News >IT firms, banks let go of prime real estate in bid to cut fixed costs

A growing number of software and financial services companies are vacating their rented offices or renegotiating their leases as the covid-19 crisis forces them to cut costs and rework expansion plans.

Housing Development Finance Corp. Ltd (HDFC), India’s top mortgage lender, has asked regional managers to renegotiate rental contracts with their respective landlords, said a person familiar with the matter, requesting anonymity.

Separately, IndusInd Bank Ltd decided last week to give up one of its leased office spaces in a prominent commercial building in central Mumbai, said an official at the private lender, also seeking anonymity. The bank is looking to bring down lease rentals across offices by 25-30%, he added.

Several other companies are either deferring new leases, or shrinking the size of leased properties, while working on plans to have more employees continue working from home even after the lockdown is lifted.

Of the net absorption of 40 million sq. ft in commercial leasing last year, nearly 42% was picked up by IT and ITeS sectors, followed by 15% by co-working companies, 10% by manufacturing and industrial companies, and more than 7% by banking, financial services and insurance companies, according to Anarock Property Consultants.

With the covid-19 pandemic jolting corporates and stressing their financial health, most firms are considering moving a portion of their businesses from prime locations to less expensive locations, as was seen during the global financial crisis of 2008. Office properties in Delhi, Mumbai and Bengaluru that are considered one of the most expensive globally, constituted about three-quarters of the net absorption in the first quarter of 2020.

Mint reported last week that another private lender Axis Bank Ltd will issue regular work-from-home guidelines for 2-3 days a week.

IT industry body Nasscom has said the industry must take a phased approach to reopening offices after the lockdown with 15-20% workforce initially till June-July. However, leasing contracts between IT firms and their landlords tend to spread over several years, which makes it unlikely for an immediate renegotiation on rentals.

“A large chunk of workspaces, particularly the back-end offices of both BFSI (banking, financial services and insurance) and IT firms, are already well placed in fairly economical locations within a city. While we do not see companies giving up their prime real estate footprints, especially where their front-end offices are located, corporates may look at reorganizing their office space needs in a bid to save real estate cost and also as a result of companies increasingly adopting work-from-home policy," said Kaustuv Roy, managing director-business solutions, Savills India, an international property consultancy and office brokerage.

“However, in the immediate- to mid-term, companies will be relooking at their expansion plans and reviewing their real estate strategies as they reset their business plans given the current uncertainties," said Roy.

Companies are also looking to defer new office leases. In March, most businesses deferred their real estate decisions in light of the impending crisis, as per a 14 April report, titled India Real Estate Market Update Q12020: Offices, by global property consultant JLL.

According to JLL, net absorption of office spaces fell 30% in the March quarter from the peak seen in the same period last year. Completion of new properties, too, were affected due to delay in obtaining requisite approvals from the government in the beginning of March, which led to a 40% dip in new office constructions to 8.6 million sq. ft. in the March quarter from a year ago.

March saw several leasing deals in the final stage of negotiations being deferred with occupiers asking for the removal of lock-in periods, JLL said in its report.

Besides reworking expansion plans and deferring real estate decisions, working from home is also expected to become the new normal, especially for IT companies. “Multiple polls across customers found they expect to continue with around 5-15% employees working from home in the long run when the situation normalizes," said Sanjay Bajaj, managing director, JLL India.

Gopika Gopakumar in Mumbai contributed to the story

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