Since the outbreak of the pandemic, the otherwise resilient office space market has been witnessing a slowdown, with many companies allowing employees to work from home (WFH). With extended closure of malls and movie theatres, retailers (in malls) and multiplex operators (like PVR and Inox) are struggling with overhead costs such as electricity and maintenance, on the back of no revenues.

 

Many have invoked the force majeure clause ― which prevents them from making payments including rent to developers. But to provide relief to office space occupiers and retailers, many retail property operators such as Prestige Estate Properties, Brigade Enterprises and Phoenix Mills, have themselves started to waive rent for their tenants. According to reports, DLF, one of the largest real estate developers in the country, has also waived minimum guaranteed rent to its (mall) customers such as retail shops, movie theatres and restaurants up to June 15 and proposes to waive 50 per cent for Q2 and 25 per cent for Q3.

Impact on developers

While rent waiver could provide a breather for office space occupiers, multiplex operators and other shops and restaurants, commercial property developers could take a hit on their revenues. For instance, with waiver of minimum guaranteed rent by DLF, the company could take a hit of ₹125 crore. According to the company’s management, about 17 per cent of the company’s rental income is from retailers. In the recent March quarter of FY20, DLF’s revenue fell 29 per cent and it reported a loss of ₹1,860 crore.

Similarly, according to a report by ICICI Securities, Prestige Estate Properties, which has about 10 operational retail segments (malls), has decided to give full waiver of rent for the period of lockdown. Overall, the company derives 30 per cent of revenues from its commercial properties which includes office space, retail units and hospital segment. Other major mall operators such as Lodha Group, Brigade Enterprises and Phoenix Mills too have waived rent for the lockdown period.

The stocks of major commercial property developers, including Embassy Office Park REIT, Oberoi Realty, DLF, Prestige and Phoenix Mills, are down nearly 30 per cent on an average (YTD).

Going ahead, with movement restrictions and control measures in place, office space demand could face a slowdown. Further, new leasing activities may not pick up in the upcoming quarters, given the economic uncertainties.

Many tenants are invoking force majeure or negotiating rental waiver, which could bring the rental income under pressure for developers in the next few quarters. For instance, PVR and Inox Leisure are negotiating rent reduction post re-opening of malls and movie theatres.

Developers with strong balance sheet and properties in prime locations may be able to withstand the storm better.

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