Among these, the Hyderabad market has seen the highest rise in vacancy levels from 5.5% in Q1CY20 to 13.3% in Q3CY21 as a combination of tenant exits and large completions/supply has contributed to this rise in vacancies.
Overall vacancy has increased from 13.5% in March 2020 to 16.9% in September 2021.
In keeping with the industry trend of rising vacancies post onset of Covid, Indian REITs and large office developers such as DLF saw strong rental collections of over 98% in FY21 and were able to achieve double digit re-leasing spreads along with contractual escalations.
A dampener was reduction in overall portfolio occupancy levels by 4-6% on like-to-like basis for Embassy REIT, Mindspace REIT and DLF while Brookfield REIT retained flattish occupancy levels in H2FY21. This was owing to exits by tenants for scheduled expiries and early exits as well.
In Q1FY22, overall portfolio vacancy levels increased further by 100-200bps QoQ on like-to-like basis for Brookfield REIT, Mindspace REIT and DLF, while Embassy REIT retained flattish occupancy levels in Q1FY22. While the second Covid wave may lead to further rise in vacancy levels in Q2FY22, we expect this trend to reverse from H2FY22E assuming that vaccinations pick up accompanied by a gradual return to offices and possible pick up in international travel.
Commentary from REIT managers and other large office developers indicate that leasing discussions which were on hold owing to the second Covid wave have now been revived again with existing occupiers talking about potential expansion and tenants who were looking to surrender space earlier looking to retain and possibly expand space.
“While vacancy levels may remain flat in Q4CY21, we expect this trend to reverse from Q1CY22E (Jan’22 onwards) with the improved pace of vaccinations across India, select corporates recalling employees to offices and gradual pick up in international travel,” the report said.
Broad consensus is that 15-20% of employees may permanently Work from Office (WFO), 10-15% of employees may permanently Work from Home (WFH) while the balance 60-70% of employees may work under a hybrid model of mixing WFO with WFH.
“While the jury is out on the eventual outcome of the back to office plans of various corporates, we model for pan- India net absorption of 18.5msf in CY21 (11.5msf achieved in 9MCY21) and build in a recovery in CY22E with net absorption of 26.8msf,” the report said.