Realty sector faces challenging times
While the residential market in India has witnessed a steady rise in demand in the last couple of quarters, the office market has continued to languish. According to a JLL report, at 5.53 million sq ft of absorption, the overall office market has witnessed a net absorption decrease of 33 per cent in Q1 2021 over Q1 2020, with Bengaluru, Hyderabad and Delhi NCR accounting for nearly 80 per cent of the net absorption during the quarter. Bengaluru and Delhi NCR were also the two markets which witnessed an increase in net absorption when compared to Q4 2020.
“While 2020 ended on a relatively high note, there was still uncertainty in the market with respect to resumption of business as usual,” affirms Samantak Das, chief economist & head, research & REIS India, JLL. “Occupiers continued to adopt a cautious approach and focussed on reassessing their real estate portfolios and long-term commitments. To add to the woes, increasing fears of a spike in Covid-19 cases in the second half of March further pushed occupiers to press pause again and postpone their real estate decisions. As the vaccination drive is gaining momentum and occupiers remain cautiously optimistic, 2021 is expected to witness close to 38 million sq ft of new completions, while the net absorption is likely to hover at 30 million sq ft, with a marginal downward bias. This will be on a par with the average annual net absorption levels seen during 2016-18.”
According to the JLL report, pre-commitments in new completions played a significant role in driving the net absorption. In the first quarter, 31 per cent of new completions were already pre-committed. The maximum pre-commitment levels were observed in the southern markets of Bengaluru (51 per cent of new completions) and Hyderabad (45 per cent). At the same time, it is important to note that the leasing momentum in some of the larger markets have remained promising in the first quarter of 2021.
The quarter witnessed gross leasing volumes of 7.5 million sq ft across the top seven markets. Interestingly, the larger market of Mumbai saw a massive jump in leasing volume from 0.5 million sq ft in Q4 2020 to 1.6 million sq ft in Q1 2021. This was driven mainly by a few select large pre-commitment deals in upcoming spaces within the BFSI space. Further, Delhi NCR saw a marginal increase in leasing volumes from 1.9 million sq ft in Q4 2020 to two-million sq ft in Q1 2021.
New completions during Q1 2021 were recorded at 13.43 million sq ft – a marginal increase of 5 per cent q-o-q. In sync with the net absorption, the markets of Bengaluru, Hyderabad and Delhi NCR accounted for nearly 80 per cent of the new completions during the quarter. On a y-o-y basis, new completions across the top seven cities jumped by 56 per cent from the 8.6 million sq ft recorded in Q1 2020. Interestingly, new completions even surpassed the average quarterly levels of about 13 million sq ft witnessed during the historic year of 2019.
“Occupiers continue to review their real estate portfolios and are adopting consolidation and optimisation strategies in order to rationalise space required while minimising costs,” says the report. “The subdued net absorption levels could not keep pace with new completions, which resulted in overall vacancy increasing from 14 per cent in Q4 2020 to 14.9 per cent in Q1 2021. Despite the rise in vacancy levels, Bengaluru, Chennai and Pune continued to hover in single digits.”
Light at the end of the tunnel
Meanwhile, office rentals in Q1 2021 remained stable across the major office markets in India. With vacancy levels still below 15 per cent and limited upcoming Grade A supply across key markets in the next few years, the office market in India continues to be tilted towards landlords. “Hence, reduction of headline rents is not a popular phenomenon and rents are expected to remain range bound in the short to medium term,” explains the JLL report. “However, landlords continue to be accommodative to the demands of occupiers and are providing flexibility via increased rent-free periods, reduced rental escalation and fully furnished deals to occupiers to close deals.”
“The leasing momentum in the upcoming quarters will mainly depend on the time taken to contain the second wave of Covid-19 cases,” argues Das. “However, it is important to point out a few things that give us confidence that there is light at the end of the tunnel”.
“The increasing attendance in offices across the major markets before the second Covid-19 wave bears testimony to the confidence and commitment of corporates to get back to working from office,” contends the JLL report. “It is important that landlords continue to be receptive to the demands of tenants and offer flexible options, in terms of space as well as value.”
Meanwhile, Knight Frank, the leading real estate consultancy, in its latest report, observes that the residential market in India has seen a steady rise in both sales and launches in Q1 2021. While launches were recorded at 76,006 units, sales were recorded at 71,963 units in the top eight cities of India.
Mumbai and Pune led the table in both launches as well as sales. These two markets benefited from significant regulatory impetus in the form of discounts in stamp duty charges that led to significant improvement in sales velocity. While end users were keen on taking advantage of the reduced stamp duty regime, developers also thought it right to take advantage of the said growth to launch new projects. In the last few weeks of Q1 2021, Karnataka also doled out stamp duty sops to home buyers for residences costing up to Rs45 lakh. However, the impact of this may only be seen in the subsequent quarters.
According to Knight Frank, home-buyers were inclined to acquire ready or near-ready inventory to minimise completion risk. This is reflected in the average age of inventory which stayed at 16.7 quarters in Q1 2021, as against 15.9 quarters the year before. This is also in line with developers focussing on liquidating older inventory before launching new products, something which has helped reduce unsold inventory levels to 0.44 million units in Q4 2020, 2 per cent less than a year ago.
“Q1 2021 saw a significant rise in sales across the key markets, led by Mumbai and Pune – the two markets that received substantial backing from the state government in the form of reduced stamp duty,” observes Shishir Baijal, chairman & managing director, Knight Frank India. “Other cities also recorded a rise in sales of homes due to a shift in attitude in homebuyers who have now started to prefer ownership. That, coupled with home loan interest rates at multi-decade lows of sub 7 per cent, a substantial correction in apartment prices, as well as increase in household savings, seems to have convinced homebuyers that this was an opportune time to purchase their properties.”
However, Baijal is of the view that, while sentiments have remained largely positive in the first quarter leading to consistent rise in home sales, the recent spike in Covid-19 cases in the country has to be factored in for the future. “We are yet to understand the complete impact of the ‘second wave’ on economic activities and resulting wealth creation,” adds the Knight Frank chief.
“The state with the largest demand – Maharashtra – has introduced a partial lockdown for April, which, apart from the fact that stamp duty has been reverted to its previous levels, will also lead to severe restrictions in public life. The extent of the impact of the second wave of the Covid-19 pandemic in India is still unknown, thus the sector will have to tread carefully to maintain its recently acquired momentum.