Home / Markets / Mark To Market /  Slow revival in office demand keeps Reits’ performance muted
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Demand for office spaces, which had taken a massive hit at the start of the coronavirus pandemic, is seeing signs of a recovery. With the gradual reopening of the economy and growing preference for working from office among corporates, the outlook for commercial property is improving, albeit at a slower pace than residential.

Latest data by property consultant Knight Frank India shows that from January to September, the market for workplace real estate witnessed an incremental activity of 13% in transaction volumes. New office completions grew 6% from the year-ago period. The report said total office transactions for the top eight markets in the third quarter of calendar year 2021 improved to reach 83% of the quarterly average of 2019.

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The report added that among the larger markets, Chennai, Bengaluru and Delhi-NCR (national capital region) recorded the highest recovery in Q3 2021 with transactions at 123%, 112% and 93% of the quarterly average for 2019, respectively. While these green shoots are welcome, a full-fledged recovery will be a long-drawn process.

“The net absorption of office space declined from 42 million square feet (msf) in FY20 to 20 msf in FY21 and vacancy level increased from 11.5% in FY20 to 14% in FY21. Furthermore, 20-25% of the workforce will opt for the work-from-home option, which should result in 10-15% loss of office space," analysts at Nirmal Bang Securities Ltd said in a recent report.

The domestic brokerage house said recoverability of commercial real estate will take another three-four years.

“Mumbai, Bengaluru, Chennai and Pune will witness lower supply addition as percentage of stock and vacancy levels will remain down i.e. 10% in FY23E," the report added.

Clearly, this has weighed on the performance of listed real estate investment trusts (Reits).

In the past one year, shares of Embassy Office Parks REIT declined by around 5%. In the same span, the Mindspace Business Park REIT stock was up 3%.

In sharp contrast, the Nifty Realty index has rallied by 136%. To be sure, this sector index comprises stocks of real estate companies that derive a majority of their revenue from the sale of residential property.

That said, a bright spot for office leasing is the strong demand outlook and robust hiring trends in the Indian IT sector. This is seen as a positive for commercial real estate as IT companies have been among key demand drivers for offices in markets such as Bengaluru and Hyderabad. This segment is estimated to have contributed an average of 40% to overall office space demand in India in the past few years.

Analysts expect the strong prospects of the Indian IT sector to translate into faster revival of rentals for office spaces, which is a key sentiment driver for Reits.

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