The two years immediately preceding the pandemic witnessed record-breaking office leasing of over 47mn sqft in 2018 and approximately 56 mn sqft in 2019, in the six key commercial markets of the country. The residential segment too, after a downturn of few years, appeared to be emerging out of the NBFC (Non-Banking Financial Companies) crisis.
However, the sector took a drastic hit in 2020 with effects lasting till the first half of 2021. It was severely impacted by varying degrees of lockdowns, restrictions and supply chain interruptions. As offices recalibrated their work strategies, transaction activity fell by 43% to 31.9 mn sqft in 2020. The second wave eroded the fleeting confidence of early 2021, and H1 2021 subsequently recorded only 10.9 mn sqft of activity. Industrial and warehousing — often reckoned as high-growth segments — witnessed an absorption decline too, as 36 mn sq ft of leasing in 2019 slid to 28 mn sq ft in 2020.
The most important lesson for real estate is probably better preparedness to tackle such black swan events in the upcoming future. Alertness and preparedness for such potentially disruptive events will play a critical role in shaping the future of real estate. The key learning is a renewed focus on wellness, technology, flexibility and accessibility.
Wellness
Wellness has entrenched itself firmly at the core of all real estate decisions. LEED/WELL certifications have attained a high degree of preference amongst occupiers. Developers are considering such buildings as potential REITable stock. Embassy REIT, for instance, has recently subscribed to the WELL Portfolio programme to create healthier office buildings and business ecosystems in the country. Buildings where COVID-appropriate guidelines can be adhered to, have emerged successfully from the pandemic. As a result, the existing stock is witnessing significant design and build modifications, including the introduction of modular elements, air purification systems, touch-free facilities, health and wellness zones, etc. Unsurprisingly, design elements are taking into consideration the mental wellbeing of employees, maximising the benefits of features such as meditation and yoga rooms, focus and relaxation zones, nap pods etc.
In the residential segment, second homes doubling up as wellness retreats have witnessed significant traction in recent times. Investor surveys, including Savills’ survey on Second Homes, indicate that health and wellness are among the most important decision-drivers while purchasing second homes.
Technology
The office space of tomorrow has been established as a mix of work from office and from anywhere. Leading companies are analysing emerging work cultures in different ways, with some of them assessing a scenario where only a fraction of the workforce works from offices at any given point of time. Technology has played a pivotal role in making such a vision possible. It has supported occupiers in returning to offices in calibrated measures with scheduling apps, virtual boardrooms and movement monitoring programmes being regular features of a workplace.
Even in the residential segment, virtual home visits and digital sales have become the norm of the day. Property searches on popular portals increased by 30 to 40% in 2020, as compared to pre-COVID times, reflecting increased level of trust in virtual home assessment and purchases. Proptech has evolved to seamlessly blend apartment management services into gated societies as well.
Flexibility
Workforce and workspaces have become highly agile and so have the real estate requirements. Flexible spaces have managed to reinvent their offerings and reposition themselves better suited to today’s dynamic world. The share of coworking spaces in office leasing is expected to reach double digits again, after falling to 8% share in 2020 (from a high of around 15% in 2019).
Large banks and other financial institutions, previously wary of using shared workspaces due to their complex needs and requirements of high security, are increasingly embracing the benefits of coworking model and have taken up managed spaces in prominent micromarkets. Flexibility is clearly seen as a benefit for space management.
Accessibility
Tapping hesitant end-users through a host of demand side measures has proved successful. Improving accessibility to real estate products, be it a home or a derivative like REIT, has paved the way for demand revival in key real estate verticals. The residential segment, especially the affordable segment, has managed to come out relatively unscathed after taking an initial hit during the lockdown. Demand-side measures including consistently low repo-rates, effective passthrough of interest-reduction to end-users, low EMIs, coupled with attractive discounts from developers, have led to sustainable home sales in the last few quarters. Stamp duty reductions of up to 2% across certain housing categories have spurred purchases in Maharashtra and Karnataka.
On a pan-India level, both launches and sales have shown a 90% YOY increase in the first three quarters of 2021. Homes with ticket-sizes of less than ₹1 crore have been at the centre of this renewed activity, contributing more than 75% of the overall sales. Affordable Rental Housing Complexes (ARHCs) and Model Tenancy Act (MTA) guidelines have strengthened both the consumer and investor confidence in the residential market of the country. Retail investors have also been encouraged to participate in office REITs with reduction in lot size, thereby improving accessibility to real estate based derivative products.
Outlook for 2022
Armed with significant learnings from the pandemic, the real estate sector appears to be gradually starting its revival. The upbeat economic performance after a period of relative lull is evident from the improvement in a host of macroeconomic indicators. Although the improvement in vaccination is very critical in dealing with the pandemic and improving business confidence, equally important are continuous efforts at policy level, supply side initiatives and demand side measures. Policy support at the fiscal, monetary, and regulatory levels must continue. The appetite from end-users needs to be rekindled through targeted demand-side measures. There is a need for consistently increasing institutional investors’ participation. On the supply-side, developers and players need to remain alert and innovative, with aspects such as wellness, ESG and carbon neutrality.
Office leasing can be expected to reach pre-pandemic levels by end of 2022 and early 2023, provided no unforeseen and disrupting events occur. A wider adoption of Hub and Spoke model, hybridising work-from-office and work-from-anywhere, is expected to gain traction in due course. Technology adoption is likely to change the way people shop and consume products and eventually lead to more warehousing requirement from industrial, manufacturing, 3PL and e-commerce players. Data centres seem to be poised for increased investor interest, as data requirements and localisation rules spur the next growth phase. Overall, real estate sector is emerging from the shadows with greater hope than it appeared a year ago.
The writer is CEO, Savills India.
