'Nothing prepared us for the Covid-19 pandemic. A global crisis of this scale that threatens life, health, income and wealth at the same time was never built into any planning calculation. The lessons from Covid-19 are important for both our lives and our money.' Excerpts from the book 'Let's talk Money' by Monika Hala.

Our worst fears are coming true, with 2021 turning out to be a more grave year than 2020. Each of us has been touched, in some way or another, this time around. This is a very difficult and distressing time for everybody in terms of life, health, income and wealth. People keep asking questions, trying to make sense, about what is going to happen in the future. One has always felt that predictions are difficult to make more so in these confusing times. May be a better way of understanding this situation is to compare the differences between 2020 and 2021 to get some sense of where we are headed to.

• On a lighter note, when somebody asked us what is the biggest difference between 2020 & 21, our instant answer was that in 2021 there are literally no webinars being organised or invites being received compared to last year. 2020 was the year of the 'webinar torture' and even if one declined many offers still ended up attending quite a few to keep up appearances. May be all the 'gyan'? got given out in 2020 and nothing more is left to be disseminated in 2021. How many times are we going to listen to the same thing again and again and again, when there is no sign of any outcome.
• On a more practical note, one big difference between both the years is lack of a timeline. Last year we were hopeful that our kid's schools & colleges would open up by June which became July then August and closer to December these finally opened but it never went back to being normal again. This year there seems to be no timeline to going back to schools & colleges. The IT industry also had a similar experience. Last year hope of going back to office was initially Q3 and then Q4, 2020, which became Q1, 2021 and now nobody knows. Difficult to project now when all these activities will start again. A successful vaccination program will help in getting some sense of these timelines and possibly put these crucial activities back on track.
• We had the opportunity of meeting a few facility heads in March and not surprisingly most did not have any timeline for getting employees back to offices this year. Some of them shared that in their internal surveys, upto that point, majority of the employees did not show any inclination of going back to offices anytime soon. Some of them mentioned that work from home (WFH) was actually good for their bottom-lines. Experiencing the deadly 2nd wave might just push the industry to hold all plans of coming back to office till a possible 3rd wave passes. This might further push any possible coming back to offices, to next year.
• Office space absorption did take a dip last year and it was sharper than what was initially expected. Most reports peg absorption at about 5.5-6 mn. sft for 2020, which is almost a 50% fall compared to 2019. This year start has been ominous with jist of reports putting Q1 2021 number around 1 mn. sft. Given the current situation absorption is likely to further dip and could take the market back by 7-8 years in terms of absorption.
• Certain factors need to be considered while analysing absorption. It is important that we start classifying co-working take-up of space on the supply side of the market. After all co-working is just an extension of the landlord or developer. For Grade A buildings co-working is another important amenity to be added to their overall development. In 2019 co-working absorption constituted about 5-7% of the entire market. Since 2020 it probably constitutes 25-30% of the market. While reporting absorption the co-working take-up is shown as demand. When the co-working brand sub-leases their space this is again reported as demand. It is basically double counting of the same space. Figures of 2020 and 2021 have significant proportion of such double counting. Sans this double counting absorption numbers might looks more dire.
• Another important factor to note is that space consolidation deals are being highlighted again and again to create an impression that everything is hunky-dory. Few large deals have been reported in the past but quite a few are consolidation deals i.e. the amount of space a client is vacating is probably almost equal to what they are taking. The market is left with more supply of old space which is difficult to market.
• 2020 resulted in the rent disruption for non Grade A properties and co-working. 2021 might be the turn of Grade A portfolios. We are already seeing hints towards this with REIT returns coming down over the past couple of quarters in which rental reduction could be a factor. Parallely when we analyse vacancy numbers in Grade A properties, it has either increased dramatically in some buildings or remained more or less the same for others.
• WFH is now an established norm and going forward it may not be a surprise that 10-15% of the current workforce might opt to continue in this model. Hyderabad's IT working professionals count has now increased to about 6.28L employees. About 40-50% of this number used to travel from east, north or south to west Hyderabad i.e. Hitec city. Unfortunately Hyderabad is a single location office market. This over concentration, of office space in west, might lead to some dissemination of office space to other locations within the city and help a 'work near home' (WNH) model grow.
• Today if an IT firm has 1000 employees then they are literally managing their operations from a 1000 locations. Going forward offices could be expected to develop into a hub and spoke kind of a model. Let us presume an IT company has 500 employees residing around Uppal / LB Nagar. Now it would better to set up a centre in these locations and allow employees to operate in a work near home model. Such companies might open a 250-300 seater centre in Uppal or LB Nagar which would cater to employees attending office 2-4 days a week. Companies will also benefit from lower real estate costs, keep the IT infra under their control and outsource the operations of the centre to a good co-working brand. This kind of a model might be better from a business continuing perspective in handling any potential covid wave or case in the future and not lead to the entire operations shutting down at once.
• We are already witnessing a co-working brand setting up a centre in Uppal. This first co-working centre in East Hyderabad @ Uppal is already under development. Going forward a lot of the current retail hi-streets could develop as viable co-working locations. East and North Hyderabad will see a few centres coming up. One should not be surprised if a co-working centre opens up in old city as well because centres would get opened in locations with heavy density of IT employee population.
• We were having an interesting conversation with a client recently who have about 700 employees working in Hyderabad. As per them 60% of their employees have moved out of Hyderabad and are operating from their respective natives. This conversation lead us to estimate how many residential rental units could have been vacated by their employees. Turns out the number is anywhere between 150-200 houses vacated. That got us thinking as to what could potentially be the rental housing vacancy currently. As it turns out this vacancy level, especially in Hitec city, is probably at an all time high.
• Let us presume the number of employees who have actually left Hyderabad to be just 25% (very pessimistic estimate) of the 6.28L employees number. The rental vacancy and impact on the city's economy is very significant. In a way when we see this vacancy number to start coming down it would mean people are coming back to the city and possibly would be the first step towards going back to offices.
• The returning IT employees would be the prime segment who could be buying residential houses. Residential sales have been sluggish for the past few months and absence of clientele probably explains it. It is safe to presume that people who are already own a house and paying EMI's might still be continuing to operate from the city. There is only so many second homes that can be sold. Strata selling office space companies target these same set of clients to invest Rs. 25L or thereabouts in owning Grade A office stock leased to global companies. Competition to attract residential buyers to invest in commercial strata deals is hotting up.
• Retail has been on a back foot in Hitec city and its vicinity. Most of the other hi-streets had recovered quite a bit and given a chance for a few brands to grow or open new stores. The 2nd wave is another blow pushing this segment to only a revenue share model in the foreseeable future.
• Land prices did not come down at all in Hyderabad rather we saw further increase in prices on back on non-compliant projects being sold in UDS or pre-sales or non-RERA approved sales. Hopefully with the government getting strict about non-compliances, might have a much needed impact on land prices.
• For our market, non-compliance is a far bigger problem than covid and if not sorted out will impact the market quite badly in the immediate future. We had an interesting conversation with a fund manager, who concentrate on last mile funding, as to why it was being projected to them that RERA compliance is not required in Telangana. Had no answers to offer and acknowledged that the city's brand will take a serious beating as an investment destination if this non-compliant trend is not arrested.

As Ms. Monika mentions in her book "And it is not the market crack of 30% in March 2020 that triggered this rethink - because both of us have done the math to show us that markets go up and down and this crack will finally fill, as have the others before this time.' Past experience shows that with real estate also this trend happens. The gap does fill up with time and real estate market will bounce back stronger and cleaner. Hyderabad has a great potential and will grow on its own merits and we need to keep giving it a leg-up as and when required.