Unique opportunity to restructure, rethink and realign

September 29, 2020

In step with the changing dynamics, businesses, the world over are realigning strategies to adjust to the new normal. The real estate sector is no exception. Even as the economy is reeling under the impact of this unprecedented health crisis, the sector has been quick to adapt and align to the altered demand, despite challenges. The result is emergence of a few interesting trends that has refreshed interest in the sector.

Emerging trends in office market space

One such visible trend is the industrial and warehousing segment, that is clearly leading the action for the sector. The Indian warehousing segment that outshone conventional real estate asset classes and attracted global investors over the past two years, was to rethink strategy with a significant spike in e-commerce as consumers were relegated to their homes. With every percentage of rise in online buying, demand for warehousing is witnessing a veritable rise.

However, with single consolidated regional warehouses unable to cater the burgeoning demand for expedited delivery (given the lockdown restrictions) supply chain managers were quick to adapt to the idea of ‘neighbourhood warehouses’ or multiple warehouses at various locations in proximity to residential clusters in lieu of single regional warehouse. Post COVID, we envisage an increased requirement for flex spaces amongst retail and e-commerce operators with operators looking for 6-12 months leases.

Transformation is also underway in the office leasing market in Bangalore, the most sought after office leasing market in India. This city typically contributes to the highest IT leasing across the country powered by strong availability of top talent, good quality commercial assets and mature developer partners backed by institutional investors. Office real estate market witnessed remarkable pace of growth in 2019.

While 2020 began on a good note for the office real estate market in Bangalore with aggressive requirements, the scenario changed by mid-March 2020, bringing business activity across sectors to a grinding halt. A gruelling H1-2020 thus ensued where there was a 50% drop in absorption, with leasing activity coming to a naught over a two-month long lockdown, that was prolonged further in the various parts of the country including Bangalore.

The city, however, is expected to recover some of its lost steam in H2 2020. Capital Markets, a select group of Global Funds and other fund backed developers are back and are presently evaluating opportunities across Bangalore. There is now and increased willingness among funds to assess and evaluate partnership models in key locations, albeit at higher margins as compared to the pre-pandemic phase.

Further, a number of Global in-house centres (GICs) continue to look at Bangalore favourably as the city offers large arbitrage on talent and real estate cost when compared to the rest of the world. Captive units or the GIC’s continue to augment strong growth plans with many transacting new offices companies.

With India positioned favourably in terms of cost, currency-devaluation, and talent availability, many GICs sending out request for proposals. Corporations making enquiries include a global search giant & MNC Tech company, a large e-commerce corporation, a European engineering firm, a global semiconductor giant and 2-3 healthcare/ pharma companies that are requesting information for over 5.5 mn sft of brand-new office space.

While there was negative absorption of approximately 2 million sq ft during the lockdown period with occupiers surrendering signed spaces before the expiry of the lease term, the positive is that Bangalore has some good quality space available. As a result, some of these above-mentioned companies can now explore opportunities for immediate growth with pre-furnished options and attractive yields.

The changing nature of the lender

Lenders are increasingly looking at brownfield projects to reduce their tenure of financing to 2-3 years, with only high investment grade greenfield projects are getting construction finance. Last mile financing at high coupon rates with the existing lender conceding primary charge of the project and taking secondary charge is another trend that is being seen.

A majority of non-banking financing companies (NBFCs) continue to sell down their existing wholesale real estate investments to other real estate funds or active NBFC’s. This trend is likely to continue till the end of the FY21. A few category II Alternate Investment Funds (AIF’s) are trying to partially fill the NBFC lending vacuum albeit at at high coupon rates in the range of 17-19%. Another emerging trend is the rise in lease rent discount by banks for new leases of blue chip corporates at very competitive rates (8%) to developers.

Residential real estate shows promise

Winds of change are visible in the residential markets too where there is a veritable rise in closures. As is the case with every slowdown, consolidation in the real estate segment seems inevitable. Over the past two months, there has been a clear rise in the buyers’ abilities with reduced home loan rates and softening of prices or good value for money being offered by developers.

Reduction in interest rates and therefore the EMIs has narrowed the gap rental values (net of income tax rebate) and home loan EMIs, thus encouraging genuine buyers to make faster decisions on the purchase of residential units. Further with direct discounts, attractive offers and flexible payment options being offered by developers, residential segment may witness a turnaround in H2-2020. Presently, there is a clear preference for completed projects and good traction on luxury segment projects as well, with buyers preferring to invest in larger, spacious developments with lower density dwellings.

The post pandemic world will bring about a multitude of changes across sectors, real estate included. Evolution as a result of the pandemic is gruelling and painful. However, as the economy limps back on track, we can look forward to many positive changes in real estate segment as all stakeholders realign their expectations and collaborate for mutual benefits and betterment of the sector as a whole.