Corporates unwilling to surrender office leases despite work from home policies
2 min read . Updated: 11 Mar 2021, 03:08 PM IST
Premium- Flexible working options that have been prevalent in workplaces over the past 12 months can be a long-term threat to office absorptions
Mumbai: Despite remote and flexible work becoming a viable option for corporate employees post pandemic, companies appear unwilling to give up leases on their office spaces. A new report by credit ratings agency India Ratings and Research found that very few companies have given up leases as they typically incur substantial upfront fit-out costs if a return to office starts sooner than expected.
"It appears that the lessees are still evaluating their long-term work-from-office policies. As office lessees have to incur substantial upfront fit out costs while moving into new premises, they are likely to be extremely cautious before cancelling any leases," the report said.
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As a result, the commercial real estate sector is expected to report a sharp upswing in rent collection in FY22 compared to the poor showing of FY21, although this is likely to still be lower than rental incomes of FY20.
The report said resumption of work from office is likely to gain momentum as the vaccination programme advances over 2021. However, flexible working options have been prevalent in workplaces over the past 12 months, which can be a long-term threat to office absorptions.
Information technology and IT-enabled services sector companies, which account for about 40% of office lessees in India, have started adopting innovative flexible/hybrid working options, hot desk policy, focusing on reducing floor space apart from permanent work from home. India Ratings expects net new absorptions in FY22 and FY23 to be around 40% below the average level seen in FY19 and FY20. However, there have been few instances of office lessees cancelling their leases.
In residential real estate, the agency expects the sector to stage a sharp K-shaped recovery in FY22. The overall floor space sold is likely to increase by 30% year-on-year in FY22 after a 34% year-on-year decline in FY21. The recovery will likely be dominated by Grade I players, whose sales are likely to grow by 49% in FY22, after a 14% increase in FY21. Non-Grade I players are also likely to see their sales rise by 26% in FY22, after a 39% yoy decline in FY21.
However, non-grade I players are generally struggling because buyers are sceptical about their ability to timely deliver projects and their access to financing remains constrained. These factors have become more pronounced during the pandemic.
Ind-Ra expects continued market share gains by grade I players, as grade II players will likely struggle to catch-up from the setbacks and delivery slowdowns suffered during the pandemic.
