COMMERCIAL REALTY’S RISK-AVERSE MODELS
Adaptable commercial realty focuses on versatile properties for diverse business needs, driven by market shifts, technological advancements, and new business methods. India has 690 million square feet of grade A commercial real estate, with 38 million square feet occupied in the first three quarters of the year, primarily in Bangalore and Delhi. As per Ajay Sharma, Managing Director, Valuation Services, Colliers India, “India's commercial real estate demand is on the rise across top seven –eight cities, with leasing activity improving in Q3. The country has three listed REITs mainly in Bangalore, Delhi, and Mumbai, totalling 78.5 million square feet of stock. As global issues impact Western economies, investors are adopting adaptable and risk-averse strategies in India's real estate market. Capital inflow into the APAC region has increased since last year, indicating greater investment interest.” Elucidating on the transformation of the commercial real estate landscape, Sanjay Dutt, MD & CEO, Tata Realty & Infrastructure Ltd and Tata Housing Development Company Ltd., stated, “The office sector is witnessing a shift in demand with growth in non-IT industries such as pharmaceuticals, healthcare, and e-commerce. Space allocation per person has decreased, but net absorption is expected to remain stable for the next 7-8 years. GCC captive centers impact India's economy, influencing retail and hospitality sectors. Global uncertainties have reduced investor interest, while REITs prosper and SEZs face challenges. India's top eight cities contain 58 micro markets, with 18 major one’s accounting for 85% of the country's leasing. Proximity to talent, transportation, and private infrastructure development contribute to their prominence. The current emphasis lies on metro connectivity, eco-friendly developments, and developers fulfilling carbon neutrality through renewable energy sources or credits.” Sharing his perspective on the flex space real estate scenario, Pratik Agarwal, Chief Business Officer, Smartworks, added, “The co-working sector in India has matured, with flexible office operators emerging as key partners in real estate portfolio planning. The industry has tripled since 2018 and is expected to double further, reaching 100 million square feet across the top nine cities. Flex spaces' operational margins are often influenced by geopolitical and fiscal risks, which also affect supply chains, making their evaluation crucial. For instance, we reduce costs in rent, maintenance, capital, and operational expenditures by utilizing economies of scale. By securing large deals, in-house management, using technology, and standardizing purchases, we efficiently cut overall expenses across our 13-city network.” On the Proptech integration with commercial real estate, Sumit Lakhani, Deputy CEO, Awfis Space Solutions, said, “Proptech, primarily focused on technology usage in property management, listings, marketing, and customer experience has helped drive innovation in co-working spaces by implementing various solutions and exploring white-labelled opportunities. Currently, PropTech is utilized across 50 million square feet, with post-2008 buildings and large developers embracing this technology.” The successful REIT listings in India have led to a surge in various investment vehicles, with a preference for non-listed options. According to Shabala Shinde, Partner, Real Estate Industry, Grant Thornton Bharat, “In recent years, there have been significant investments in various asset classes, such as warehouses and data centers. REITs have shown potential, with certain requirements like a 500-crore asset size and revenue-generating operations. Private equity players, domestic investors, and pension and sovereign funds are investing now, seeking consistent returns. Commercial real estate including office spaces will be beneficiaries of thREI investment model.” Girish Singhi, Head, Investments, Godrej Fund Management concurred, “Today, REITs mainly invest in core and core plus assets, such as stabilized and developable properties. However, yields are declining due to rising interest rates and other factors. In discussing commercial real estate stress, it's crucial to understand the differing contexts of interest rate fluctuations in the US and India. In India, stress is reduced due to lower leverage levels. For effective commercial real estate investment, consider location, product, and risk assessment. Focus on micro-markets based on development stages and create a well-designed product to attract tenants.” EMPHASISE ON OPERATIONAL EFFICIENCY Discussing the critical infrastructural transformation, Sanjay Dutt said, “India's top eight cities contain 58 micro markets, with 18 major one’s accounting for 85% of the country's leasing. Proximity to talent, transportation, and private infrastructure development contribute to their prominence. Minimal government involvement is observed. The current emphasis lies on metro connectivity, eco-friendly developments, and developers fulfilling carbon neutrality through renewable energy sources or credits”. Expressing his views on significance of operational efficiency for improvement, Ajay Sharma cmented, "Based on my comprehension of the occupiers' viewpoint, rental pressures will consistently arise as they continue to hold their position as prominent space tenants. Operational efficiency is crucial as 63% of firms adopt hybrid workspace models. Individuals are considering tier-2 cities for work, and flexible space operators are exploring opportunities there. However, cost arbitrage in rental agreements is an important factor in expansion to tier-2 cities.” Girish Singhi added, “In the past, real estate was seen as an asset class were acquiring a quality building and securing long-term tenants sufficed. However, the modern real estate approach prioritizes amenities like childcare, shuttle services etc. and emphasizes the importance of environmental, social, and governance factors. Regarding how adaptive asset repurposing enhances return on equity, ESG-compliant buildings offer economic benefits such as attracting better tenants, higher rents, and cost savings through energy efficiency. Increased demand from tenants and investors drives developer interest. The challenge is transitioning to renewable energy, given the current reliance on non-renewables like coal.”. Sumit Lakhani added, “I will discuss this matter in two parts: operational efficacy in tier 1 and tier 2 cities and the potential of tier 2 cities. In response to uncertain times, our strategy focuses on acquiring underperforming properties in limited markets and transforming them into profitable assets. With an optimistic view of tier 2 cities due to urbanization, the portfolio covers one million square feet, catering to local businesses, multinational corporations, and talent competition arising from hybrid work arrangements.” Explaining the MSME REIT legislation and DESH policy, Shabala Shinde said, “The MSME REIT model connects small-scale investors to commercial properties through fractional ownership and is overseen by an asset management firm. It promotes retail investments and requires existing fractional ownership platforms to transition to MSM REITs. The Desh initiative optimizes unused space in SSZs by merging services and enterprises, offering tax incentives, and relaxing foreign exchange requirements. Addressing concerns regarding tax neutrality, valuations, and incentives is essential for further progress.” Sanjay Dutt added, “The Desh discussion led to a decision to amend the current act under the Ministry of Commerce and Finance. Existing SEZs will not be affected, while new SEZs with insufficient employment and benefits may lose tax advantages. Allocating vacant land for domestic use could increase government GST revenue. The final decision is pending release." Addressing the influence on the future commercial real estate market, considering that they comprise 14% of current leasing, Pratik Agarwal stated, “Flex operators streamline space acquisition and management, transforming building and human interactions. Modern real estate prioritizes services, hospitality, and amenities. In fact, many cases reveal a significant carbon footprint increase during the re-adaptation process, necessitating offsets and addressing related issues. While, ESG compliance, certifications, and green technology are vital, selecting the correct approach to a specific solution is vital. Prioritizing district cooling, energy conservation, expanded seating, water recycling, and waste management reduces operational expenses and staff, enhancing client value." IT IS ESSENTIAL TO HIGHLIGHT THE ONGOING TRANSFORMATION IN OFFICE CULTURE, WHICH AFFECTS BOTH LARGE AND SMALL ORGANIZATIONS. THE EVOLUTION OF CO-WORKING SPACES HAS TRANSITIONED FROM COLLABORATIVE ENVIRONMENTS TO SUPPORTING BUSINESSES AJAY SHARMA GRADE A OFFICE SUPPLY SHORTAGES OFFER OPPORTUNITIES FOR LATE INVESTORS. FLEXI WORKSPACES WILL CONTINUE TO GROW ALONGSIDE TRADITIONAL OFFICES WITH FOCUS ON SERVICE-ORIENTED APPROACH, EMPHASIZING COST PER SEAT OVER RENT PER SQUARE FOOT. SANJAY DUTT MORE ASSETS ARE EXPECTED TO MOVE UNDER REIT STRUCTURES IN THE COMING YEARS, AND INDIA PRESENTS SUBSTANTIAL GROWTH POTENTIAL FOR REITS IN OFFICE SPACES OVER THE NEXT FIVE YEARS. SHABALA SHINDE GREEN BUILDING INVOLVES TWO ASPECTS: CONSTRUCTION AND TENANT FIT-OUTS. THE OPERATORS RECOGNIZE THE IMPORTANCE OF SUSTAINABLE MATERIALS FOR THE TENANTS, MAKING THEM AN EXPECTED STANDARD IN BOTH ASPECTS OF THE PROPERTIES. SUMIT LAKHANI DECISION MAKERS SHOULD CONSIDER LOCATION, EXITS, RENTAL RATES, SERVICES, COST REDUCTION, AND TENANT VALUE AND GREEN BUILDINGS FOR THE LONG TERM ECONOMIC BENEFITS ALONG WITH AS TRANSITIONING TO CLEANER ENERGY SOURCES. GIRISH SINGHI FLEXIBLE WORKSPACES CATER TO INCREASED EMPLOYEE ENGAGEMENT, AGILE LEASE AGREEMENTS, AND HYBRID WORKING MODELS, OFFERING BENEFITS BEYOND REAL ESTATE AND POSITIVELY IMPACTING OVERALL COMMERCIAL REAL ESTATE SECTOR. PRATIK AGARWAL
Tags : Pratik Agarwal REIT listings Sanjay Dutt SUMIT LAKHANI GIRISH SINGHI PRATIK AGARWAL AJAY SHARMA MSME REIT