A staggering ₹37,072 crore worth of annual rent from office leases are at risk over the next 12 months as technology and financial services tenants consider a permanent shift to remote work amid the coronavirus pandemic.
As the trend gathers pace, property developers are worried that it may severely cramp their ability to exit real estate investment trust, or REITs, a company that manages a pool of rent-yielding assets and allows developers to monetize them.
Technology and financial services firms occupy the bulk of top-grade commercial real estate assets. They are also at the forefront of the trend of shifting permanently to remote work.
Around 391 million sq. ft of commercial space is at stake within the next 12 months, according to a report by real estate data provider CRE Matrix released in May. Of these, around 186 million sq. ft have completed the lock-in period and will see leases expire within 12 months, the report said.
As the pandemic rages in India, IT firms have more than 90% of their staff working from home and many of these firms have been contemplating making remote work a permanent measure for at least a part of their employee base.
On Friday, a report in the Economic Times suggested global IT firm IBM may reassess and exit half of its long-term tenancies in India, although the company has called the reports “inaccurate”.
IBM is the biggest tenant of Embassy Office Parks REIT, contributing to 12% of the REIT’s annual rental income and covering 3.6 million sq. ft of office space, according to exchange filings. The Embassy REIT stock fell 1.08% on Friday.
The second REIT to attempt a public listing—Mindspace Business Parks REIT—also counts IT services firm Accenture as its biggest tenant. Accenture accounts for 8.7% of Mindspace Business Parks’ annual rental income, occupying 1.9 million sq. ft of office space, according to the draft IPO prospectus filed by the company in December.
Both Embassy and Mindspace derive almost 50% of their rental income from IT firms. “The IPO market is weak due to covid and with concerns that IT firms will relook their real estate strategy, one feels that public offerings of REITs will be a challenge this year. Investors will want to wait two to three quarters to see how this plays out,” an investment banker said on the condition of anonymity.
“Some 219 million sq. ft of office space across India has a lock-in expiring in the next 12 months or beyond, and amounts to ₹20,704 crore of annualized rent receivable to landlords. Further, around 249 million sq. ft of office spaces have either gone past lock-in expiry dates or do not have such clauses,” the CRE Matrix report said.
These office spaces that are past lock-in amount to ₹23,228 crore of annualized rent receivables to landlords.