IT, BFSI companies may vacate prime real estate to reduce fixed costs
Indian IT and financial services companies are reorganising their office properties by deferring new leases and favouring work from home for an extended period even after the lockdown is lifted.
Last week, a large private bank decided to vacate its premises in one of central Mumbai's best known commercial spaces. Reports suggest that more companies from the finance and technology sectors are likely to follow suit as they look to trim rental outgo.
According to real estate broking firm ANAROCK , of the total commercial leasing net absorption of 40 million square feet in 2019, nearly 42% was occupied by the IT/ITeS sectors, followed by 15% by co-working providers, 10% by manufacturing/industrial and over 7% by the banking, financial services and insurance (BFSI) sector. Most firms are considering moving parts of their current operations and activities from prime offices to less expensive locations amid the global health crisis triggered by covid-19. Last week, Mint reported that Axis Bank is going to issue regular work-from-home guidelines for 2-3 days of the week. Some reports also suggest that banks are in the process of renegotiating their rent contracts and may stand to gain 10-20% of their rental outgo.
IT industry body Nasscom has said the industry must take a phased approach to resuming operations with 15-20% workforce initially till June-July. However, IT leases are in general spread out across multiple years so an immediate call on renegotiation is unlikely.
"A large chunk of work spaces, particularly back-end offices of both BFSI and IT firms, are already well placed in fairly economical locations within the city. While we do not see companies giving up their prime real estate footprint where their front-end offices are located, corporates may look at reorganizing their needs in an attempt to save real estate cost and also as a result of companies increasingly adopting work from home," said Kaustuv Roy, managing director, business solutions, at Savills India, an international property consulting and office brokerage firm. However, in the immediate to mid-term, companies will relook at their expansion plans and reviewing their real estate strategies," said Roy.
In March alone, most businesses deferred their real estate decisions in light of the impending crisis, according to global property consultant JLL.
Moreover, occupiers are adopting conservative leasing strategies and have put decisions regarding fresh take-up of spaces on hold for the next couple of months, JLL added in a report. The net absorption of office spaces, according to JLL, in January-March fell 30% from the peak observed in the corresponding period last year. The new completions, too, were affected by the delay in obtaining requisite approvals from the government in the beginning of March, which led to a 40% dip in new office construction to 8.6 million sq. ft. in the first quarter of 2020, compared to the same period last year.
While the momentum in office spaces continued in the first two months of 2020 before the pandemic affected the Indian market, in March several leasing deals in the final stages of negotiation were deferred with occupiers asking for the removal of lock-in periods and a downward revision of rents, the report said. Besides re-working expansion plans and deferring real estate decisions, work from home is also expected to become the new normal, especially for IT companies.
“Multiple polls across customers on found that they expect to continue with around 5-15% employees working from home in the long run," said Sanjay Bajaj, managing director at JLL India. Last week, Infosys resumed operations with about 5% of the its workforce, while its competitor Tata Consultancy Services (TCS) Ltd has already said that work from home will become the "new normal".
“In the medium to long run, the current health crisis will lead to corporates re-evaluating their commercial real estate strategy to make it more resilient to such shocks. Business continuity plans and remote working strategies have been successful. Hence, future demand from occupiers is likely to consider the need for flexible work space," the JLL report noted.
This could encourage occupiers to reduce capital costs, place greater emphasis on employee well-being and sustainability, and fast-track the adoption of flexible working practices, the report said.
TCS plans to allow 75% of its 4.48 lakh employees to permanently work from home by 2025. According to reports, however, TCS is still proceeding towards building additional IT parks for research and development (R&D) facilities in Noida, Thane and Pune as these plans were initiated before the lockdown.
“Then social distancing norms will also require businesses to utilize more space by up to 10%, so the net negative impact on space utilization is very little," Bajaj added. JLL expects demand for commercial space to bounce back to normal by mid-2021 led by sectors like pharmaceuticals, med-tech, cyber-security and e-commerce.
May 14, 2020