Tushar is Founder & Managing Director at Studiokon Ventures Pvt Ltd, an office interior design company focused on turnkey solutions.
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In the time of a pandemic, business leaders are facing challenging decisions. It's a time that has forced leaders to think outside the box. When you step out, the most unexpected opportunities emerge. In the real estate sector of India's economy, new opportunities spurred from office space and manufacturing needs are ready to be unlocked.
India was already a global offshoring hub for some of the world’s largest corporations. Covid-19 hasn't changed this fact, and as India’s lockdown eases up, early indicators are pointing to a sharp V-shaped recovery in 2021–2022. Retail car sales, toll collection and food sales are getting closer to pre-Covid-19 levels. After a monthslong hiatus, India’s top retailers have started scoping out space to open new retail outlets as footfalls and shopping in India’s malls slowly return to normal.
Office Space
I am most optimistic about a strong recovery in India’s office market, and with it, a host of interlinked new opportunities. I believe it will be one of the fastest real estate segments to bounce back. In 2019, the IT sector alone occupied office space of 758 million square feet across India's top eight cities, according to data collated by Knight Frank Research. While the pandemic has boosted an increase in working from home (WFH), there are obstacles to sustaining this trend that will keep commercial real estate in demand in the long term.
Space constraint in a typical Indian home, patchy internet connectivity, data security concerns, and lower employee engagement and motivation are a few of the barriers to making WFH a long-term solution in India. The low cost of office space is another. When looking at the occupants of the largest amount of office space — IT companies — leasing costs are a small fraction of the budget. Real estate operating expenses make up less than 5% of the annual operating income for IT companies, according to research from Knight Frank. While this is one sector of companies that use office space, it provides a glimpse into the factors other industries may be contending with as they decide on a long-term plan for leasing office space.
It's not just rent weighing on leaders making decisions about leasing. The same research from Knight Frank highlights that 90% of the 1600 IT employees interviewed miss being in an office, and many feel their productivity has dropped over time. Knowing the research was collected in 2019, it's entirely possible that the stress of a pandemic and the quick change to working from home could have more of an impact on not only IT employees, but those from other industries. The biggest advantage India has is its human capital. Desiring to keep people motivated and highly productive in an office conducive to those outcomes will, I believe, encourage most organizations to bring their employees back to the office, safely.
That is perhaps why even against the backdrop of Covid-19, commercial real estate investments continue. Before the pandemic, some of the world's biggest real estate investors were buying assets in India. Today, interest in commercial real estate assets continues with the recent debut of Mindspace Business Parks REIT at an 11% premium to its original offer price.
The opportunities are not limited to the big gun private equity investors, as evidenced by a new REIT coming on the market that allows for a more diverse pool of investors to join in. This means service and product companies have opportunities to enter the Indian market thanks to continued interest in office space — in spite of the pandemic. My prediction is that service and product companies will have three big opportunities within real estate: proptech, flexible sustainable office spaces and products that improve employee well-being.
Proptech companies could deliver on virtual and augmented reality tools for leasing and density solutions for safe distancing, as well as advanced cost-effective touchless doors, lifts and visitor management systems. Product companies can more sell easy-to-move furniture and fittings, flex meeting rooms and hot desks, as well as phone booths and standing workstations. Everything that can improve employee well-being, from better-quality HVAC systems to power-saving lighting and e-mobility solutions, can find a market in India.
Manufacturing
Manufacturing can require a large amount of real estate, and in India, there are opportunities to enter the market by collaborating with Indian firms. There are also opportunities to set up entire independent facilities as Ford Motor Company did with a sprawling 40-acre facility in Gujarat.
Policymakers are working overtime to boost domestic manufacturing capabilities and make the country more self-sufficient. I believe India knows it can become the manufacturing hub of global corporations looking to de-risk their supply chain from China. Between a stimulus package announced in May 2020 covering a multitude of industries and a $6.6 billion stimulus aimed at manufacturers, the government has taken decisive policy action to not only recover in the midst of a pandemic, but grow into the future.
The focus on manufacturing is in line with 2014 research that highlighted manufacturing as a key to India's development. The report from PwC projects that as India continues to urbanize and industrialize, manufacturing will have the opportunity to provide jobs to a wide array of workers — which in turn will affect income across various population segments.
In 2016, McKinsey Global Institute estimated the number of India's middle-income households will more than triple to 89 million by 2025. Even with a global pandemic, growth in the middle class cannot be fully stopped, and India is poised to become a well-sized consumer market — with needs and desires for the latest products and services.
India's continued need for office space and its positioning as a manufacturing destination for everything from cars to mobile phones shows a bright future for not only its economy, but the real estate sector as well. The range of capabilities makes India an attractive target, and its overall growth leading to a larger middle class could turn it into the world's next dynamic consumption story.
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