Slow recovery in office demand keeps Reits performance muted

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Demand for office space, which took a heavy hit at the start of the coronavirus pandemic, is seeing signs of recovery. With the economy gradually reopening and the growing preference for working from home among businesses, the outlook for commercial real estate is improving, albeit at a slower pace than residential.

The latest data from real estate consultant Knight Frank India shows that from January to September, the workplace real estate market saw an additional 13% of transaction volumes. New office completions increased 6% from the previous year. The report says total office transactions for the top eight markets in the third quarter of calendar year 2021 improved to 83% of the 2019 quarterly average.

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The report adds that among the largest markets, Chennai, Bengaluru and Delhi-NCR (National Capital Region) recorded the highest recovery in the third quarter of 2021 with transactions at 123%, 112% and 93% of the average. quarterly for 2019, respectively. While these green shoots are welcome, a full recovery will be a long process.

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

The national brokerage firm said recovering commercial real estate would take another three to four years.

“Mumbai, Bengaluru, Chennai and Pune will experience a smaller increase in supply as the percentage of inventories and vacancy levels will remain down 10% in fiscal year 23E,” the report adds.

This clearly weighed on the performance of listed real estate investment companies (Reits).

Over the past year, Embassy Office Parks REIT shares have fallen by around 5%. At the same time, Mindspace Business Park REIT shares increased by 3%.

In contrast, the Nifty Realty index rose 136%. Certainly, this sector index includes shares of real estate companies that derive the majority of their income from the sale of residential properties.

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

Analysts expect the strong outlook for India’s IT sector to translate into a faster recovery in office space rentals, which is a key sentiment factor for Reits.

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