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Office  leasing  set  for  slow turn around despite economic recovery

Companies are unlikely to fast track their expansion plans unless the pandemic-led economic uncertainty is completely out of the way. (Mint)Premium
Companies are unlikely to fast track their expansion plans unless the pandemic-led economic uncertainty is completely out of the way. (Mint)

  • Knight Frank India's data shows that office leasing activity saw a two-fold rise on a sequential basis to 1.63 million sq. m in the Dec quarter
  • A quick turnaround in office leasing activity is not foreseen at least for the next six months, say analysts

At the peak of the coronavirus crisis, increased adoption of the work-from-home culture came as a dampener for commercial properties. At the time, analysts had cautioned that though demand for office spaces may not get completely wiped out, leasing activity would be affected.

Office leasing activity improved in the second half of 2020, latest data by property consultant Knight Frank India showed. In the December quarter, office leasing activity saw a two-fold rise on a sequential basis to 1.63 million sq m. However, total office transactions for H2CY20 dropped 33% year-on-year (y-o-y) to 2.06 million sq m. These include fresh transactions, relocation-based transactions, and pre-commitments.

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Further, average office rents in Bengaluru, Chennai, and Hyderabad maintained 2019 levels despite the volatility seen in 2020. Rents in Mumbai, Pune and the national capital region, however, fell by 5.6%, 6% and 4.4%, respectively, showed research. The decline in total transactions in the second half of 2020 so far isn’t as bad as anticipated, according to experts at Knight Frank. Still, a quick turnaround in office leasing activity is not foreseen at least for the next six months. Companies are unlikely to fast-track expansion plans unless the economic uncertainty caused by covid-19 is completely out of the way, some analysts said. Until the global covid-19 concerns reduce, corporates will relook at their space requirements in 2020 and expansion or consolidation plans will be put on the backburner.

A dismal state
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A dismal state

“Given the fact that 30-40% of Indian office space demand originates from the US, a prolonged economic slowdown in the US will likely lead to reduced demand for offices in H1CY21. We expect leasing activity to pick up from H2CY21 as international travel may pick up again along with effective Covid-19 vaccines," analysts at ICICI Securities Ltd said in a report on 12 January.

Little wonder then that supply has come off. New office completions in 2020 dropped by 42% year-on-year to 35.5 million sq ft, showed the Knight Frank data.

On a sectoral basis, IT-ITES remains top-most in terms of share of office occupancy across major Indian cities. Analysts estimate the sector’s share in office occupancy at 35-40%. Stellar earnings performance of IT majors does provide a glimmer of hope for recovery in office leasing activity. However, the adoption of hybrid working models, which do not require employees to come to the office on a daily basis and is cost-effective, could delay the revival of office space demand.

“Our channel checks suggest that office collections remain steady, but the three big unknowns may limit sector re-rating: once travel restrictions ease, will lease momentum pick up; consolidation of offices; the extent of renewal of the expiring leases on the backdrop of firming up of work from home policies," analysts at HDFC Securities Ltd said in a report on 12 January.

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