Covid-19 brought global economic activity to a grinding halt in a matter of days and consequently all segments of our real estate market have been affected negatively. It is too early to predict what will happen next, but Covid-19's impact will be the hardest of all times. Never before has a global pandemic put the entire planet on lockdown mode. This crash has consequences for the global economy, socio-economic structures, demographics, livelihoods and global business dynamics. The world as we knew it has changed and possibly will never be the same again.

To quote an article of EGI "Real estate must prepare for its most painful recession yet, with the International Monetary Fund(IMF) warning that the global economy is entering the worst downturn since the Great Depression. The IMF expects the global economy to contract by 3% this year, as the coronavirus pandemic triggers a "crisis like no other". The loss to global GDP over the next two years could reach $9tn (£7.7tn), greater than the economies of Japan and Germany combined. Real estate's ability to withstand the crisis will be put to the test like never before."

Let us see some pointers on how Covid-19 will impact Hyderabad's office market:

• Before we look into the future it is important to take note of the lessons from our past experiences. Hyderabad's real estate market has been one of the most resilient markets in India and probably the world. The previous market crash across the world started in 2008. For most of the world and Indian cities recovery happened by 2010 Q1/Q2. Hyderabad's downward spiral continued till 2014 as it endured political disturbances post the financial crisis of 2008. Not sure of any other market which rose like the phoenix to achieve newer heights of development after a rigorous 7 year battering.
• Demand side: 2019-20FY was the best phase for the market with absorption touching 10mn sft. The SEZ deadline of March 31 hastened many companies to take up more space in the final few months of 2019-20, until Covid-19 stopped everything dead in its tracks around mid March. We saw a lot of new companies setting up shop in the city and existing ones expanding. Such was the exuberance in the market that some occupiers are sure to be saddled with unwanted space at this point in time.
• Supply side: Demand remained higher than supply in the last FY. This imbalance has been around for a few years now. As of March 31 most of the operational Grade-A IT parks and SEZ's had 100% occupancy or close to that. Many of the upcoming Grade-A IT Parks and SEZ's had reported good leasing pre-commitments from their clients. Supply was expected to catch up with demand by end 2020 or early 2021.
• Supply side: This imbalance had prodded many developers to add a lot of supply. We were given to understand that just the top 5 developers were planning to construct an unbelievable 100mn+ sft over the next 4-5 years. The grand total of the expected supply numbers, of all office developers combined, over the next 4-5 years was becoming unfathomable and unpalatable. We expect a lot of curtailment in supply side construction plans in the medium to long term. A realistic assessment can only be done post lockdown, once developers get a reassurance on pre-commitments and after reassessing their financial closures for ongoing projects.
• Warm shell rentals: Grade-A IT parks and SEZ's in Madhapur where being quoted in the range of Rs. 78-85/sft/month prior to the lockdown. Realistically, closures would have been in the range of Rs. 70-75/sft/month. Market fundamentals seemed strong before the lockdown and rentals had no reason to get affected but eventually negative sentiments are likely to prevail. In the immediate aftermath of the lockdown rental waivers for the non-operational period were being discussed. As the lockdown keeps getting extended, hints about overall rental reduction are being given. Occupiers would keep trying to push rentals down but this will take time as supply side vacancy remains negligible especially in Grade-A.
• Maintenance: Post lockdown building or office maintenance would become the most critical aspect of evaluating properties. Grade-A facility teams seem geared up to these challenges to make workspaces compliant to upcoming social distancing norms and increased focus on health safety and security requirements. Occupiers would demand more focus on, erstwhile less important matters like, internal office and building density, visitor management, social distancing during office hours, internal air quality, technical backups and emergency preparedness.
• Maintenance: Absentee landlords or owner associations would find it extremely challenging to maintain buildings to these ever challenging post lockdown scenarios. Maintenance would make or break building leasing reputations going forward. The entire dynamics of maintenance, car parking, lift management, technical backups, statutory compliances, etc., will change and would require more investments from developers and owners. Pre-lockdown it was a common site to find even basic building setback norms being violated to accommodate more car parkings or the terraces being converted into makeshift cafeterias. All this will change drastically towards becoming more compliant or else the building's demand reputation will come down gradually.
• Future demand: The Indian economy started showing signs of overall weakness in 2019-20. Inspite of this, space take-up in Hyderabad remained high since our demand depended on the IT sector only and predominately the US market followed by the European market. With major economies like US, Europe and China going into recession, demand side is expected to get affected. It is difficult to project now but most likely demand for IT space will go down. This coupled with increased supply will put pressure on rentals to go down. Developers are lucky that market is not saddled with over supply at this point in time. If course correction is made on the expected excess supply, then rental pressure could ease out. Hope better sense would prevail and developers take stock amongst themselves and plan this course correction.
• Future demand: Outsourcing model itself might be under pressure since the assumption that moving operations half way across the world as BCP would itself be questioned in today's scenarios. Alternatively India's handling of the Covid-19 crisis will definitely add to its reputation as a bankable location for the IT sector. Given the scenario that we have practically lost Q1 of 2020-21FY and companies would be delaying decisions, overall demand is likely to contract to possibly 60%-70% levels of pre-coved levels. If GOI decides to extend the SEZ application last date by 12 months then that could help build more demand and stem the fall in overall demand.
• Capex: One aspect which remains clear is that occupiers will avoid spending capex on fitouts for a few years to come. They would rely on landlord or co-working companies to provide space with fitouts.
• Past data might be a better way to analyse today's market. The previous market crash started in 2008 and lasted till 2014. The crash prior to that was in 2001 which was the pre-SEZ era and possibly less relevant now. Rental rates in leading SEZ's in Hyderabad prior to 2008 had touched a peak of Rs. 42-43/sft/month. When the markets crashed the bigger developers panicked the most. 3 things happened then, first spaces in larger IT parks / SEZ's where realigned to cater to smaller requirements of 5-10K sft, second rentals finally settled at around Rs. 28-30/sft/month and last the landlord's were always open to invest in capex. Absorption had dropped drastically to a trickle with supply being in excess at that point in time. Space take-up was dependent on existing occupant's consolidation or growth. New companies space take-up was a rarity.
• An important point to be noted is that loss of business days then (between 2008-14) was nowhere close to what has already been lost by all of us currently. Nothing came to a grinding halt like in the current times. The economic cycle was moving and had not stopped completely.
• Decongestion of Hitec City: The government's plan to promote East Hyderabad might get a major flip post Covid-19 as companies might realise the futility of transporting 40-50% of the over 5.5 lac IT professionals across the city everyday. Social distancing and lesser travel time is likely to push this decongestion. Work hubs like Secunderabad, Begumpet, Khairatabad, LB Nagar, Uppal and Mehdipatnam are likely to be revived or reconsidered as office locations.
• Future warm shell rentals: Due to twin factors of lower demand and more supply, warm rental Grade-A rentals might settle around Rs. 60-65/sft/month. Madhapur being the peak, peripheral markets would show gradual rental reduction, with suburbs like Kukatpally touching around Rs. 45-50/sft/month for Grade-A buildings.
• Co-working segment could turn out to be an interesting segment to watch. Hyderabad already has more than 50 brands in this segment and a consolidation was already on cards. We expect co-working brands which operate on pure rental model and depend on cash burn to come under a lot of pressure and quite a few will close down. We should not be surprised to see some current landlords operating their own brands when their existing co-working tenants give up space. Expect major shift in this segment in terms of density planning and tighter commercial terms. Landlords are expected to be more open to revenue share deals. Tenants might actually prefer co-working options because of nil capex and better commercial terms compared to normal landlords. Co-working brands are also expected to operate across major work hubs across the city as part of the Hitec City decongestion push.
• Agreements drafting would also see a lot of changes. Currently a lot of tenants, landlords and brokers are reading force-majeure clauses for the first time. A lot of changes can be expected in the way agreements are drafted in future.
• WFH: A lot is being said about work from home (WFH) possibilities. Our experience with clients is that all major tenants undertake a fairly detailed and time consuming technical, legal, compliance and infrastructure due diligence on office buildings before taking space. In some cases their clients also do further rigorous due diligence and only then the space is approved for take-up. Basis this due diligence major changes are proposed to the building and / or space. Even within the tenancy period regular building audits are done to cross the initial due diligence. We have not come across a single major tenant willing to start operations without fire NOC and occupancy certificate being issued by the GHMC. We operate from a co-working centre and find that major occupants use their own exclusive leased line and do not use the common IT infrastructure. WFH might be practically applicable for only 10% of the current work. If anything the density and social distancing might push tenants to take up more space to comply with new rules.

Hoping for a better future is all we can say at this present situation and the only silver lining is that the office segment would be the first segment to recover in the post Covid-19 scenario.