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Marginal coronavirus impact on office spaces, co-working players to be disrupted: ICRA

NEW DELHI: The effect of coronavirus is expected to have a differential impact on the commercial real estate (CRE) sector in India. ICRA believes that the impact on office space real estate players will be marginal.

Some of the states have already enforced closure of offices while many others have strongly advised the same; however, in contrast to the retail players, the revenue impact for office space tenants due to closure of office spaces is expected to be limited.

Furthermore, rental expenses form comparatively smaller proportion of the total cost structure of office space tenants. The rental expenses typically form 1-2.5% of revenues of the office space tenants. Better technological support has enabled large number of office tenants to provide work-from-home facilities to employees and hence operational disruption is expected to be limited.

Nevertheless, the rating agency believes that new leasing discussions are getting significantly impacted and the situation is likely to continue in Q1 FY2021. Therefore, the ramp-up of leasing for sub-optimally occupied and recently completed properties will get delayed. In case of an extended shutdown or subdued economic activity, the properties with weak counterparties may experience delays in rental receipts.

Additionally, operational difficulties and administrative issues like curtailed movements, impacted bank operations, unavailability of signing authorities may also delay the rental receipts. Hence, ICRA believes that even though the probability of loss revenue is low for office space players, the presence of liquidity buffers will remain critical to sail through the possible cash flow mismatches.

Further, there could be re-evaluation of long-term office space planning by companies to tackle such exigencies in future.

“Notwithstanding the short-term disruption, we believe that the commercial real estate sector will continue to attract adequate interest from investors and tenants alike in the medium to long term. ICRA, at present, does not foresee any structural change in the office space segment due to the ongoingCOVID-19induced crisis,” said Anand Kulkarni, assistant vice president and associate head (Corporate Ratings), ICRA.

The co-working spaces segment is likely to experience comparatively higher impact as the tenants typically are start-ups or smaller and financially weaker entities. These tenants would prefer to negotiate on the rental payments as the share of rental expenses is typically higher for them than a normal office space.

Due to the ongoing crisis, the agreements between the co-working space operators and tenants may also undergo changes, thus shortening the tenures or seeking more flexibility. Probability of delays in rental receipts in co-working spaces might be higher over the next few months, considering weak counterparties.

Structurally, the co-working space operators might face challenges going forward in case a sizeable number of target clients get habitual to the work-for-home set-ups and hence the overall demand decelerates. Possible changes in lease agreements like preference for extremely short-term agreements (ranging in few days) as against the current practise of monthly or quarterly agreements may also force the co-working spaces to re-strategise their operations.


March 25, 2020

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