JLL India Report - India Office Market Update Q1 2020

Office net absorption down 30% in Q1-2020 from 2019 peak

·        Net absorption was recorded at 8.6 mn sq ft, with pre-commitments accounting for 4.9 mn sq ft

·        Bengaluru, Mumbai and Delhi NCR accounted for nearly 75% of the net absorption

·        New completions were recorded at 8.6 mn sq ft, a  40% y-o-y decline

·        Hyderabad 2019 growth pauses in Q1 2020

Mumbai, April 13, 2020 – India’s office market across seven major cities remained resilient in the first quarter of 2020, despite a challenging global economic climate. Approximately 52-mn sq ft of Grade A office space was completed and more than 46 mn sq ft absorbed in 2019 according to the ‘India Office Market Update Q1-2020’ released by JLL, India’s largest real estate consultancy firm today. 

“Office assets offered high growth and stable returns. Investors, domestic and foreign alike chased investment ready commercial assets and development opportunities in top cities,” adds the report. However, the impact of the COVID-19 pandemic became more apparent in March as most businesses defer their real estate decisions. Net absorption of office spaces in Q1 2020 witnessed a decline of 30% from the peak observed in Q1 2019. IT-ITeS (56%) as well as co-working (13%) occupiers drove leasing activity during the quarter. Furthermore, construction activity and the process of obtaining requisite approvals from the government also slowed down in the beginning of March, in line with growing concerns of the impact of COVID-19. “New completions were recorded at 8.6 mn sq ft in the first quarter of 2020, a 40% drop as compared to the same period last year,” adds the report.

“The evolving COVID-19 crisis is prompting corporates to re-evaluate their commercial real estate strategies, with a focus on enhancing resilience measures. There will be a greater emphasis on cost management, employee wellbeing and sustainability, and the adoption of flexible working practices as resilience practices ramp up,” said Ramesh Nair, CEO & Country Head, JLL. “Over the next few months, leasing is expected to be mainly driven by renewals and consolidation activity. With fresh take up of spaces likely to be limited over the next couple of months, landlords might have to sit on locked in capital (completed buildings) for a relatively longer time period,” he added

Net absorption more challenging

The three larger markets of Bengaluru, Mumbai and Delhi NCR accounted for nearly 75% of the net absorption in Q1 2020, despite the overall decline in the overall market. Net absorption in Mumbai and Chennai more than doubled in Q1 2020 as compared to Q1 2019, led by strong leasing activity in the first two months by IT/ITeS occupiers. However, the global health crisis arrested the growth of the Hyderabad market with limited relevant supply coming into the market, declining by 78% in net absorption in the first quarter of 2020 year-on-year. Resultantly, Hyderabad’s contribution to overall net absorption fell from 29% in Q1 2019 to 11% in Q1 2020.

Massive dip in net absorption

	Q1 2016	Q1 2017	Q1 2018	Q1 2019	Q1 2020	Q1 2020 Growth (Y-o-Y )
Net Absorption (mn sq ft)	10.6	4.3	6.8	12.3	8.6	-30%

Note: Top 7 cities include Delhi NCR, Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata                       

Source:  Real Estate Intelligence Service (REIS), JLL Research

“The strong leasing momentum of 2019 continued in the first two months of 2020 before the pandemic impacted the Indian market in March. Several leasing deals in the final stages of negotiation were deferred as the office market witnessed a net absorption decline of 30% y-o-y. New completions also saw a fall of 40% y-o-y during Q1 2020. Several office assets in the final stages of completion were stuck owing to delays in obtaining requisite approvals from the government authorities,” said Samantak Das, Executive Director and Head of Research, REIS, JLL.

.Bengaluru, Mumbai and Delhi NCR account for nearly 3/4^th of net absorption

 Source:  Real Estate Intelligence Service (REIS), JLL Research

Strong pre-commitment buoyed office absorption during the quarter

Office absorption in Q1 2020 was backed by strong pre-commitment levels in new completions during the quarter. The quarter witnessed a net absorption of 8.6 mn sq ft of Grade A office space, out of which pre-commitments accounted for 4.9 mn sq ft.

All new supply in Chennai and 83% of new supply in Mumbai during the quarter was already pre-committed, correlating with broader office leasing trends in both markets. The single digit vacancy markets of Bengaluru and Hyderabad also saw strong pre-commitment levels (>50%) in new completions during the quarter. 

Pre-commitment in new completions stood at more than 50%

 

Source:  Real Estate Intelligence Service (REIS), JLL Research

IT-ITeS occupiers drove the pre-commitment activity across most of the major office markets in India. These occupiers require larger floor plates and pre-commitment becomes a necessity in markets with very limited availability of Grade A office spaces.

New completions take a hit with delay in obtaining approvals

New completions were recorded at 8.6 mn sq ft in Q1 2020, a fall of 40% Y-o-Y from levels observed in Q1 2019 and representing the second largest dip witnessed in new completions in the last five years. Post demonetization, new completions dropped to less than 20% of that seen in Q1 2016.  

New completions take a massive hit

	Q1 2016	Q1 2017	Q1 2018	Q1 2019	Q1 2020	Q1 2020 Growth (Y-o-Y )
New Completions (mn sq ft)	10.7	1.8	7.5	14.3	8.6	-40%

Source:  Real Estate Intelligence Service (REIS), JLL Research

In sync with net absorption, Bengaluru accounted for a major chunk of the new completions in Q1 2020. The Delhi NCR market, which gained steam in Q4 2019, witnessed a fall of 44% in new completions y-o-y. Hyderabad’s rise in the office market was also paused with new completions in Q1 2020 decreasing by 68% y-o-y. Even though Mumbai witnessed new completions of 0.84 mn sq ft in Q1 2020, supply of commercial Grade A office spaces in primary submarkets remained constrained.

Bengaluru and Delhi NCR account for more than 60% of new completions

Source:  Real Estate Intelligence Service (REIS), JLL Research

Vacancy levels remain range bound across markets

Vacancy levels came down to 12.8% in Q1 2020 from 13.3% in Q1 2019 (Table III). Cities like Bengaluru (5.6%), Hyderabad (7.7%), Chennai (8.0%) and Pune (5.5%) continued to hover at single digit vacancies. Bigger markets such as Mumbai and Delhi NCR recorded vacancy levels of 12.7% and 27.2% respectively.

Vacancy in Grade A office space witnesses a dip

	Q1 2016	Q1 2017	Q1 2018	Q1 2019	Q1 2020
Vacancy	15.5%	14.5%	13.8%	13.3%	12.8%

Source:  Real Estate Intelligence Service (REIS), JLL Research

While the vacancy levels at the city level is high due to the higher availability of office space in the peripheral submarkets, vacancy was recorded in the lower single digits in the prime business submarkets (for instance, BKC in Mumbai and Cyber city in Delhi NCR hovers at <5%).

Looking ahead

Over the next few months, leasing is expected to be mainly driven by renewals and consolidation activity.  With fresh take up of spaces likely to be limited, landlords might have to sit on locked in capital (completed buildings) for a relatively longer time period. Occupiers have also begun renegotiating their lease contracts for lower rents, an extension of rent-free period as well as waiver of lock-in periods. Short-term liquidity concerns might arise for developers/landlords with occupiers seeking concessions.

Co-working operators, who are more exposed to short-term contracts, may face greater problems if members decide not to renew, while operators with more secured medium-term and long-term contracts will be less exposed.

Business continuity plans and remote working strategies have been successful. Hence, future demand from occupiers is likely to take into account the need for flexible workspace.

About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management, headquartered out of Chicago. A Fortune 500 company with annual revenue of $16.3 billion, JLL operates in over 80 countries and a global workforce of more than 93,000 as of September 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, please visit jll.com.

In India, JLL has an extensive presence across 10 major cities (Mumbai, Delhi NCR, Bengaluru, Pune, Chennai, Hyderabad, Kolkata, Ahmedabad, Kochi and Coimbatore) and over 130 tier II & III markets with a cumulative strength of close to 12,000 professionals. Headquartered out of Mumbai, we are India’s premier and largest professional services firm specializing in real estate. Our services cover various asset classes such as commercial, residential, industrial, retail, warehouse and logistics, hospitality, healthcare, senior living, data centre and education. For further information, please visit jll.co.in

JLL India Commentary on RBI Rapo Rate | Mr. Ramesh Nair is the CEO & Country Head of JLL India

Purposeful action to mitigate the adverse macroeconomic impact of the pandemic

This is a very significant move with substantial monetary policy intervention at a time when COVID -19 has impacted the economy at large. This is in conjunction with economic package announced by the finance minister yesterday for the poor. In addition to other benefits, the package is expected to benefit 3.5 crore registered construction workers. This is also a perfect orchestration of the joint efforts by the Central government, State governments and the Central Bank to deal with this global health crisis.                                                                  

In these unprecedented times, the 75 bps rate cut (bringing down current the repo rate to 4.4%) combined with a reduction of 90 bps in reverse repo rate and other measures to infuse liquidity into the system is a welcome move. The repo rate reduction has even breached the 2009 level mark when the economy was hit by the global financial crisis and the policy rate fell to 4.75 per cent. This is to ensure revival of growth, mitigate impact of covid19 while containing inflation. The reduction in reverse repo rate will encourage banks to resort to enhanced lending to productive sectors of the economy at a time when growth of credit is slowing down. It shows the central bank’s willingness to use all the instruments at their disposal to mitigate the impact of a global pandemic on the functioning and the stability of the Indian economy and the financial sector . The injected liquidity of 3.74 lakh crores along with the 3-month moratorium on all term loans by financial institutions will alleviate short-term liquidity concerns and help developers as well as home buyers  survive in these uncertain times. It is a big relief for developers and homebuyers to help them mitigate the challenges faced by them currently. It is pertinent to note that total outstanding loans of real estate developers from Commercial banks, NBFC s and HFCs is estimated to be around INR 4.5 lakh crore as of March 2020. At the same time, this moratorium will definitely benefit homebuyers as these financial institutions have lent an estimated INR 20 lakh core as of March 2020.

It is important for immediate transmission of these rate cuts to the home buyer which will boost consumer sentiment. The state governments should also take necessary steps to utilise the cumulative INR 31,000 crore funds for the welfare of building & construction labourers to help those who are severely impacted by the economic disruption on the back of the lockdown.

Ramesh Nair, CEO and Country Head, JLL India

Three pillars of working remotely: Staying Connected, Staying Productive and Staying Healthy 

As the world struggles to deal with a virus that the medical community has limited knowledge about, and in the middle of the COVID-19 pandemic, India has its battle clearly chalked out – a spluttering economy, stressed core sectors, and a country with questionable health and safety standards, packed to the brim with 1.3 Billion+ people.

The one way to ensure we stay safe from the novel coronavirus, is to adopt extreme measure of social distancing. Precaution, definitely is the cure, at the moment! To enable such control, almost all state governments have advised on adoption ‘Work from Home’ policies. This is the only viable option for the population’s safety.

Here I would like to draw inspiration from one of my favourite authors Ray Dalio when he says, “If you can’t successfully do something, don’t think you can tell others how it should be done.”

Being an industry leader, it is always important to define the strategy that the organisation would follow and succeed in implementing the same. We have been extremely agile in not just setting the narrative but created an ecosystem that enables and encourages our employees to seamlessly shift into the new paradigm.

So how can we do it?

By remaining extremely focused and productive.

As our teams start working remotely, we are continuously encouraging our team members to set aside space at their home as their work place. It may require a little discipline in the beginning, but it is essential to have a dedicated work space. Team members are also encouraged to send a Daily Activity Report or DAR for the day that helps their line managers track the work done every day. We make sure that all members stay connected with their managers by scheduling regular interactions, we encourage managers to have review calls in the evening to check what the team member has accomplished during the day. To encourage a two way communication, the teams conduct daily virtual meetings via what’s app video chat / WebEx / FaceTime / Microsoft teams etc.

During these times, in order to get the desired results, our managers make sure that their respective teams set top 5 priorities for the day right in the morning that would define their day and produce results.

So what are the overarching mantras or best practices to make remote working a success?

We define them under these three categories: Staying Connected, Staying Productive and Staying Healthy.

Staying Connected comes from being visible. We need to makes sure that we are visible by keeping the laptop camera on. Sending engagement signals like nodding our head or unmuting the microphone from time to time ensures that we are visible. Doing a simple video call at the beginning and the end of the day, even as short as a 10 minutes call ensures that our “check-ins’ are in place. A virtual brainstorming session discussing the challenges and opportunities with the team members help ensure that we continue to work as a team, however remotely. It is also important therefore that when we are sending calendar invites for virtual meetings, we add relevant agenda and documents. And last but not least, we must ensure that we stick to regular work hours.

While staying connected, it is of paramount importance that we Stay Productive. Productivity when working remotely comes with discipline. Make sure you choose a quiet space with less disturbance. It also helps to keep your routine intact, have a dedicated work area, take breaks between work, by walking away from your ‘work desk’ at regular intervals. It is also important to ensure that there is a dedicated beginning and end of the day. You may go for a walk or a jog at the end of the day Focus is importance. We bring the focus by working in a 20 minute ‘sprints’. Limit distractions and use tools such as egg timer to time your 20 minutes. A key challenge for productivity can be the fact that, while we are working from home, our children and other family members are also at home. We need to be more accommodating, accepting and understanding. We may need to work at different hours to ensure our deadlines are met.

By being intentional, we set ourselves clear goals for the day and reward ourselves for the successful completion of the same. Productivity gets a major boost when we are flexible and trusting. During these times, it is essential that we focus on ensuring team connections and ‘trust’. Productivity also comes from getting the ergonomics right. Positioning the laptop screen at about an arm’s length from us with the top of the screen level with our eyes and with the forearms approximately horizontal to the keyboard will ensure better ergonomics. Taking a 5-10 minutes breaks also help de-stress the eyes.

What is non-negotiable is Staying Healthy in these times. And this begins with knowing and managing our own stress levels. We need to recognise our own behavioural, physical, emotional and cognitive responses to stress and work towards reducing the levels. And how can we do that? Take regular beaks throughout the day, take a walk, and take a break. Nothing helps like a few minutes away from the screen. In a day and age when we are inundated with stories on social media. It helps to take a break from watching, reading or listening to news stories including the ones from social media.

These are difficult and different times. But these are also times when we will make the future, a present and we will practice more innovation than ever before.

With better ideas, better technology and better understanding of the needs of the hour, we will be able to work productively and deliver results.

JLL India article on - Additional office space of around 100 mn sq ft expected to be listed in REITs

The evolution of REIT-linked investment options in India reflects the maturity of the office market

Ramesh Nair, CEO & Country Head – India, JLL

·        The success of the first REIT by the Blackstone-Embassy JV has bolstered the confidence of other developers and investors to come up with similar listings

·        Developers with a commercial asset portfolio can use this option to reduce their debt

·         The growth of REIT listings in India will ensure more transparency

The success of the first REIT in India, Embassy Office Parks, has created the possibility that around 100 mn sq ft office space could be listed under REIT in the short to medium term out of the total REIT-worthy assets of 302 mn sq ft. The total REIT-worthy assets, which includes Embassy Office Park REIT, would translate to a potential investment of USD 38.6 billion.

As per JLL Research, India’s top six cities, Delhi-NCR, Mumbai, Pune, Bengaluru, Chennai and Hyderabad, account for a majority of the share of Grade-A office space assets. Marquee clients occupy these offices. And India’s leading commercial office space developers are exploring REIT listings.

The strong demand for office space in 2019 adds to the market of REIT-worthy assets.

The success story of India’s first REIT

Embassy Office Parks launched in April 2019 and heralded a new investment journey and has redefined the growth of the sector. Its performance has put to rest all apprehensions and it is likely to lead to the more REIT listing in the country. It has bolstered the confidence of other developers and investors (primarily with commercial office asset portfolio) to list their assets under REIT platform.

The Embassy Office Parks REIT has seven office parks and four office buildings in Bengaluru, Pune and Noida with two completed and two under-construction hotels totaling 1,096 keys. The total portfolio is of 32.6 mn sq ft comprising 24.2 mn sq ft completed and 2.9 mn sq ft under-construction office space and proposed development area of 5.5 mn sq ft.

The REIT has registered robust numbers since inception. Revenue from operations for 2Q FY2020 grew y-o-y by 15 percent to Rs 5,206 mn and cumulatively grew y-o-y by 17 percent for 1H FY2020. Net operating income for 2Q FY2020 grew y-o-y by 16 percent to Rs 4,384 mn and cumulatively grew y-o-y by 18 percent for 1H FY2020. Net operating income margin for 2Q FY2020 and 1H FY2020 stood at 84 percent.

For the reasons above, Embassy Office Parks’ REIT is currently trading at a premium of 37 per cent to its allotted price as on November 25, 2019. This performance, during adverse market conditions, is likely to attract more retail and global investors.

Embassy Office parks REIT: 37% returns since listing on April 1, 2019

Source: NSE

What we may witness in future?

For instance, Bengaluru-based Prestige Group has 11 million sq ft of rent yielding assets and nearly 15 million sq ft of under-construction office assets. As per market reports, there are strong indications of Blackstone Group and K Raheja Corp listing their jointly-owned 20 million sq ft commercial portfolio through REIT. Together, these players would account for almost 50 percent of the potentially upcoming REIT universe. As per publically available news reports, other players who are also considering REIT listings include Bengaluru-based RMZ Corp, Mumbai-based Godrej Properties and Pune-based Panchshil Realty.  

Key trends that will guide the growth of REIT in India

The success of Embassy REIT brings to the forefront some of the key trends that will influence the growth of REITs in India.

With the success of the first REIT, subsequent listings are expected to make a gradual start in India in line with global trends. Several positive factors such as progressive policies, smaller lot size, tax efficiency, strong investor interest and presence of global investors will work in favour of REIT listings in India.

A strong demand-supply condition in the office market would also drive the return of REITs. However, any impediment to the supply pipeline will impact the REIT listings too.

Some challenges

Limited knowledge and awareness of the new product are one of the biggest hurdles in front of fund managers. Moreover, investors have not even seen a full year of the run for the first REIT. Compared to this, they already have multiple alternate investment options across other asset class to look at within the ambit of the capital markets.

Since REITs are listed on the NSE and BSE, trends in the equity markets will influence the return expectations of retail investors looking at REITs market. As a result, like any other market-linked investment option, retail investors have to be told about the risks.

The outlook

India’s commercial office space is expected to dominate the REITs market due to its robust growth, resulting in rising rental yields and steady rise in capital values. Despite certain challenges in terms of investor awareness about the product currently, interest is expected to increase over the years.

The growth of REIT listings in India will ensure more transparency and maturity due to the mandatory regulation over property valuation, regular updates, research coverage and disclosures relating to assets managed by REIT.

Developers with a commercial asset portfolio can use this option to reduce their debt from proceeds received by listing their assets through REIT. Though the growth in the REIT market in India has been gradual, we can expect it to pick up significantly going forward.

JLL India | JLL IDEAs - Proptech Summit ’19

Real Tech for Real Estate

Earlier this year, we launched JLL IDEAs - India’s BIGGEST Proptech Accelerator Programme. This initiative has seen an overwhelming response from the startup ecosystem and the fraternity alike. We’re now presenting the top 15 Proptech startup to you at our upcoming event. JLL IDEAs - Proptech Summit ’19.

We are pleased to invite you to an evening full of exciting tech-led sessions, panel discussion and an award ceremony, followed by networking cocktail and dinner.

Date: 22nd November Time: 5 pm Onwards followed by Networking Dinner and Cocktail Venue: Hyatt Regency Mumbai Sahar Airport Road, Ashok Nagar, Andheri East, Mumbai, Maharashtra 400099

Join us for this one-of-kind Proptech Submit. We are certain that some of the innovation ideas we showcase will be relevant to your business.

Speakers –

·         Ramesh Nair, CEO & Country Head – India, JLL

·         Albert Ovidi, COO- Asia Pacific, JLL

·         Sandeep Sethi, Managing Director – Corporate Solutions, West Asia, JLL

·         Deepak Bagla, Managing Director & CEO, Invest India

·         Sumit Chowdhury- CTO, Brookfield

·         Moderated by Anuj Nangpal, APAC Lead, JLL Spark