Leasing activity expected to pick up from September 2021 : Report

The second Covid wave in India may lead to a delayed recovery for the office market and leasing is expected to pickup towards the end of September 21, vs July 21 earlier, according to a report by ICICI Securities Limited.
The current trend of occupiers downsizing and delaying new leasing decisions to continue in the near-term, the report said.

Along expected lines, the Indian Commercial Real Estate (CRE) office market has seen a 47% YoY decline in Q1CY21 (Jan-Mar’21) net absorption at 3.6msf.

“However, we remain positive about the long-term resilience of the Indian office market, with a limited number of 8-10 large pan-India office developers, India having affordable rentals of under 1 USD/psf/month and an abundance of STEM talent. We remain bullish on office asset developers and reiterate our BUY ratings on DLF, Embassy REIT, Oberoi Realty and Brigade Enterprises,” the report said.

While CY20 was a weak year with 20msf of net absorption owing to Covid impact, the company expect net absorption to gradually improve and build in net absorption of 24.3msf in CY21E and 29.8msf in CY22E.

“We expect leasing activity to pick up from September 2021 as international travel may pick up again along with effective Covid vaccines. We believe that cumulative net office absorption of 80msf over the next years (CY21-23E) compares well with overall upcoming Grade A supply of 117msf over the same period of which 20-30% may be shelved, leading to effective supply of 80-85msf,” the report said.

According to the report, REITs have emerged as a potent asset monetisation tool. With three REIT listings in India, the door has opened for more potential REIT listings from FY22E onwards.

With India having 488msf of occupied Grade A office stock as of March 2021 and global institutional investors continuing to invest in annuity assets, ICICI Securities expect more REIT listings over the next 2-3 years.

Developers such as DLF, Phoenix Mills and Oberoi Realty have already highlighted their medium-term plans to consider a REIT listing.

Further, large annuity portfolio buyouts in FY21 such as Blackstone buying out Prestige Estates’ office and mall assets and Brookfield’s acquisition of RMZ’s office portfolio points to consolidation in favour of institutional landlords for annuity assets.

The report points out that listed annuity players expected to weather the storm.

“We expect annuity asset players to weather the storm even in an environment of delayed leasing decisions and 5-10% correction in rentals,” the report said.

Indian Commercial Real Estate (CRE) office market saw record leasing in CY19 with 42msf of annual net absorption. The office market has been in a upcycle over CY14-19 with rising rentals, falling vacancies, consolidation among developers and emergence of REITs.

At the beginning of CY20 (January 2020), the outlook was bright with healthy pre-leasing for upcoming supply. However, the evolving global situation owing to the Coronavirus (COVID-19) has led to CY20 net office absorption of 20msf in which is a 50% YoY decline.