Commercial real estate could see temporary delays in leasing due to Omicron: Anurag Mathur, CEO, Savills India

Indian real estate, particularly commercial real estate, could see temporary delays in signing new leases due to disruptions related to Omicron; But the long-term outlook for the sector’s categories – home sales, rental of office and retail space and alternative asset class developments – remains intact, said Anurag Mathur, CEO of Savills India.

However, Omicron’s impact is likely to be short-term and minimal on residential housing; while calendar year 2022 could see increased interest from institutional investors in the sector.

In an interview with BusinessLine, Mathur talks about the impacts of Omicron in CY22, the outlook for the year and the growing demand for other asset classes. Edited excerpts:

Is Omicron an immediate threat to the recovery of the real estate sector?

For now, the effects are still minimal. But we have to see when the peak of infection occurs and when it reaches its low point. Generally, anecdotal evidence suggests that the faster the peak, the faster the drop. The recoveries multiply shortly after.

In terms of residential sales, there is strong demand in the market and it is expected to continue in 2022. Demand could be pushed back by around a month due to mobility restrictions, but facts such as higher interest rates low, a punctual supply and delivery of homes and strong interest from buyers, especially younger ones, will continue to tip the scales in favor of increased sales.

Will commercial real estate follow a similar trend?

Despite working from home asking questions about slowing demand for office space, 2021 outperformed 2020 in terms of rental and absorption. The year 2022 also looks to be a strong year if the rental pipeline is taken into consideration. We have not observed any cancellation of leasing commitments, nor any renewal of shutdowns to date. In 2020, there has been a significant increase in downsizing and cancellation of renewals. But none after the more disruptive second wave we saw last year. In fact, leasing has resumed.

However, there could be some delay in signing the agreements and this too because the number of infections is high. So there may be delays of about a month; but the chances of cancellations are extremely low.

I also think people have started to take these waves of infection into account when looking at return to work policies. Take the example of some of the developed countries of the West. Despite high infections, they call them endemic, continued as usual with minimal restrictions and disruption. We could also consider a similar situation in the future.

But has commercial real estate returned to pre-Covid levels?

Not yet. If 2019 levels are taken as the parameter, then leasing and rental activity will reach these levels around 2023 or 2024. The 2020 disruption to the sector has been quite severe – labor migration, funding issues, hospitalizations – resulting in slower project deliveries, lower supplies and even cancellations of renewals and contracts.

And even with the increase in infections now, don’t you anticipate a drop in supply in grade A offices?

I think the developers take into account such issues like increase in infections, sporadic increase in cases etc. Main evidence, after the disruptions of the second wave of 2021, very little construction activity has stopped or derailed. Once some of the restrictions were lifted it was business as usual. So even now I think the developers are aware and are taking precautionary measures to ensure project completion and deliveries.

What are the prospects for alternative asset classes like warehousing?

If I may say so, 2021 was the year of beds and sheds – residential and storage.

Indian warehousing is entering a boom period driven by e-commerce, fast-paced commerce, 3PL, pharmacy, among others. In fact, not only the big cities like Delhi or Mumbai, but also the small towns of level II and III are experiencing a boom in warehousing. This trend will be more marked in the coming days, as there will be enough room to develop. However, Delhi and Mumbai as regions will dominate the segment for some time.

The other part is the date center. Previous operators preferred centers near cable landing stations. Chennai and Mumbai were therefore obvious choices. Now the trends are changing and people are ready to move inland. So places like Noida (Uttar Pradesh) are expected to experience good growth. In addition, there are enough captive audiences to allow growth inland.

Will institutional investors continue to express their confidence in Indian assets?

I don’t see why they won’t. The real estate sector is growing and the long-term outlook appears to be intact. Commercial or office space will continue to generate great interest as Category A supplies improve; warehousing and data centers are the second most popular asset class, followed by residential.

Blackstone is one of those big global investors who now has (warehousing) interests in India.

With listed developers (in residential) growing in importance, we expect a good inflow of private equity in 2022; maybe 10 to 15 percent of PE driveways will be in residential projects. However, commercial real estate and the industrial and logistics sector will continue to be the engines of institutional investment.