Commercial property prices, rentals have corrected in range of 5-30%-Aditya-The Office Pass

The commercial property prices and their rental values have gone down across the country in the range of 5-30 percent. The correction is more in CBD areas of cities with high concentration of IT/ITeS companies, says Aditya Verma, Founder & CEO, The Office Pass (TOP). In an exclusive interview to RealtynInfra.com, Verma talks about the learnungs from last years pandemic and lockdown, implications of consolidation in the coworking indsutry The Office Pass's expansion plans. Here are the excerpts:     

How do you see rest of 2021 unfolding for the co-working industry in the country? 

COVID-19 pandemic was an un-expected shock for the world. No geographies or industries, including Co-working, were spared. The Indian Co-working industry experienced a roller coaster ride over the past 12-13 months. The average desk occupancy fell from a healthy85% in Jan-Feb 2020 (per-COVID period) to almost ZERO during April-Sept 2020. Government, organizations and people at large were fearful of the un-known and economy took a severe beating. There was some initialrevival during the Oct-Dec 2020 with average desk occupancy reaching around 50 percent.    

As cure against the virus became visible and business confidence started to improve, the occupancy came back to its pre-COVID levels during the Jan-March 2021 quarter. The industry saw major gains during the Feb-March period. Based on thisdemand momentumI can confidently predict a meaningful bounce back in the Coworking business for the rest of 2021. As far as The Office Pass (TOP) is concerned, we have opened all 8 Coworking offices in Delhi NCR and the month of March-21 was our biggest revenue month. 

There is a sudden rise in COVID cases in mid-April and we may experiencesome hiccups over the next 1-3 months. However, with Indian urban population getting vaccinated, I expect the dark clouds to recede making way for long term growth for the sector. 

Do you see consolidation a possibility in the industry in 2021? How good or bad will consolidation be for the co-working industry in India? 

Indian Co-working industry is a very young industry. Consolidation at this stage is not desirable as different business models and themes are yet to play out. One does not know which model will be successful in India. Consolidation is good only after an industry has achieved some maturity and there is momentum in favor or against a theme. I personally feel we are at least 4-6 years away from reaching a mature stage.                

Currently, the Indian Industry hasthree types of Co-working operators. Firstly, operators that are unit economic positive (pre-COVID) and not dependent on external sources of funds to sustain their business. Then, there are commercial property owners who have converted their ideal properties into Co-working spaces to generating some RoI. Finally, there are Indian Co-working companies, modeled around global Co-working players, who were opening spaces with an expectation to achieve sky high valuation.COVID-19 has challenged all the three categories. 

In my view, the category that wasexpectinghigh business valuations will find it extremely difficult to expand operations without external financial support (which looks distant). They would either shut shop or reduce their size in line with the money available with them.

Property owners and Co-working operators with unit economic positive business are better placed to navigate thru this un-certain period. They stand to reap the benefit of a sentiment revival in the post COVID world. Consolidation is un-likely to play our in 2021. 

What has been the learnings for the co-working industry from the pandemic and how is the industry poised for growth (or Stabilisation) going forward?   

Every crisis brings in its own set of learning’s and COVID pandemic is no different. Some of the key learning’s for the Indian Co-working Industry are

Learning #1: There is no substitute to a scalable business model – Short term momentum around an idea or concept has limited legs. Ultimately the business has to make economic sense to sustain and scale. Many Indian Co-working players, who were in the market for fancy valuation, learned this the hard way. It is difficult to scale a business whose cost of servicing the customer is more than the customer revenue. These players will need to re-look at their business model or face an un-certain future.

Learning #2: Plan for the rainy day – All businesses should plan a contingency fund. This can come in handy when the going gets tough or the business is faced with un-certain times (like a pandemic). Depending on the type of industry, this fund should help the businesssustain for 6-12 months of un-certainty. Without this planning, you are putting your business at high risk. 

Learning #3: Genuine help always gets reciprocated – If you help someone during their hour of need, they always reciprocate the gesture. During the lockdown last year, The Office Pass (TOP) identified travel, tourism, recruitment, hospitality and wedding planning were the most adversely impacted segments. When the lock-down was lifted and businesses started returning back to work, TOP offered rent free period ranging from 3-6 months to members from these industries so they could focus on work, without worrying about office related expenses. TOP also promoted these members among our social circle. This gesture was reciprocated by members by way of business leads to TOP sales team. Ultimately it was a Win-Win for both sides.

I feel, post pandemic, organizations are looking at Co-working spaces favorably as they do not want to bind themselves with long term traditional leases and invest in CAPEX for office fit outs. They want a ready to move in office with the flexibility to add or reduce headcount in line with their business requirement – this is possible only with Coworking spaces.

Even MNCs and Large Indian organizations are opening up to the idea of Coworking and Managed offices. This is a marked deviation in their behavior from the pre-pandemic period.These points are providing the Coworking industry the much needed tailwind. It is reasonable to assume, that Coworking adaption will be much faster in the post-COVID period.

What are the current trends emerging in the industry?

There are a few new trends that have emerged over the past 12 months, notable among them are 

Trend #1: Move from centralized to de-centralized or distributed offices – many businesses have realized that COVID virus is here to stay. Companies & their employees will have to learn to live with the virus. To ensure business continuity, companies are moving from centralized to distributed offices to minimize the impact of a COVID outbreak at any single location. 

Trend #2: WFH to Work Near Home or Neighborhood Co-working – companies are unable to achieve desired employee productivity in the Indian WFH scenario. This is on account of multiple factors including Indian joint family system; small size of Indian houses; lack of study area in Indian household; stigma associated with WFH; poor connectivity and data security issues. 

As competitive intensity picks among Indian companies, the ones with WFH stands to lag behind- especially if the work requires collaboration and customer outreach. To prevent this productivity loss, companies are allowing employees to work form a Co-working office close to their place of residence. This practice, being followed by The Office Pass (TOP), is popularly known as Neighborhood Co-working. Employees are able to reach office without the use of public transport which prevents the spread of virus making it a win-win.   

Trend #3: Extensive use of virtual meetings – companies are minimize large gathering of people, employees or vendors at a single location. Key decisions including product launches, vendor evaluation, product marketing etc isbeing finalized thru a call over Microsoft, Zoom or Google platforms. 

Co-working companies have seen a 60% jump in request for meeting and conference room booking over the past 3 months (Jan-March 2021). Small vendors of large companies, candidate appearing for interviews etc are using the Hi-tech meeting infrastructure of Co-working companies to present a professional image.   

The Office Pass (TOP), Paras Downtown Center, Golf Course Road, Gurgaon

Has there been a correction in real estate prices for the co-working players? I mean, are there developers and property owners who are offering their properties at lower prices/rentals to the co-working players? If yes, what is the percentage reduction as compared to the beginning of 2020?  

Commercial property prices and their rental values have corrected across the country in the range of 5-30%. The correction is more in CBD areas of cities with high concentration of IT/ITeS companies. These areas will continue to face high vacancy over the coming few quarters. The price correction is also high in commercial buildings where theproperty ownership is with individual investors. Many investors rely on rental return for their livelihoodand are open to negotiate lower rental with Co-working operators.

To give a live example, The Office Pass (TOP) was running two Coworking offices in Sohna Road since 2018 at an average property rental of 60/- per square feet.In January 2021, we opened a new office in the same area at a reduced rental of under 40/- per square feet. TOP is also in discussion for one more office in Gurgaon at a rental discount of around 20 percent compared to the pre-COVID levels.

What opportunities exist in tier 2 and 3 cities for the co-working players?

Currently the commercial real estate stock is concentrated in the in top 8 Indian cities. The total grade Astock is around 600-650 million square feet. Annually around 35-40 million square feet of fresh stock gets added; while the absorption is 30-35 million square feet (pre COVID). There is almost 15 percent of vacancy in the national Commercial real estate market.  

For knowledge organizations, office space is normally the second or third highest expense after manpower & marketing, so it pays to think strategically. There is little evidence to suggest that people who went back to their hometowns during the pandemic will not return back to cities.

Economic activity in India is concentrated in top 8 cities. There is limited scope - if one wishes to pursue growth in tier 2 and 3 cities. In my views it will take a decade or more for the infrastructure development to reach small towns and districts. Till that happens, it is difficult to conceive a thriving Co-working business outside of main cities.   

What are your expansion plans in the next 1-2 years? 

The Office Pass (TOP) has set aggressive target to expand over the next 3 years. We believe preference for Neighborhood Co-working space will increase in the post-COVID period. TOP currently runs eight Co-working offices in DelhiNCR. Six of these offices are in Gurgaon with one each in Noida and South Delhi. 102 companies use TOP Neighborhood Co-working spaces. Over the next three years, weplan to open 35 Neighborhood Co-working and 15 Managed offices in 5 Indian cities and target over 1,000 companies.  

 

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