KNIGHT FRANK VIEWS ON CORPORATE REAL ESTATE

(CRE) MARKET

F O R E W O R DCovid-19 has created a previously unimagined, extraordinary situation for every-one, and without doubt, our primary collective effort must be to safeguard life and health of our people. Even as the pandemic and consequent lockdown has brought economic activity to a virtual standstill, a strong resolve to adapt and stay afloat must be demonstrated by all.

For the corporate real estate segment, these are times that are compelling us to think both in short term as well as in long term. As a community today, we are taking time to think of the entire concept of “Office Space” as we know it – the physical space, the safety and security, Health and hygiene and most important-ly, the people who we are expected to work in it. The current situation is leading to great debate about the future workspaces.

Our concerns range from Productivity to revenue optimizations to adoption of technology during and after the great lockdown. When we ultimately emerge from the Covid-19 crisis, business users may need to find a new balance of their real estate to support business transformation requirements and the economic pressures generated by the crisis.

Our main concern today is to see what kind of recovery we as an economy as well as the real estate sector can make from this “Great Lockdown”. What would be the winning formulae and how will they apply to our future workplace. There will be a structural change in the DNA of work across the world, where we will emerge to have new sensibilities towards office space. The post lockdown work-ing environment will change in its structure, culture and constituents of business and influence the form and function of a workplace.

It is quite clear that most commentators believe the Covid-19 crisis will lead to some fundamental changes in business, government and society.

Our belief is that this will be a staggered return to the ‘new normal’. From the old normal prior to the COVID- 19 outbreak, we are in a phase of total lock-down, this will ease to limited operations with strict guidelines on social distancing etc. and then whenever the vaccine is developed and commercially available, the move to the new normal.

We have no idea of “what is going to be on the other side” once the pandemic is over. We do not know what the “New Normal” will be. What will be the psyche of employees at the end of this pandemic? What percentage of the workforce will continue to work from home and how the workplace strategy adapt to the new reality.

However, having said this all, we feel that the mid to long-term future of corpo-rate real estate still looks strong on the back of the growth projections of the US economy backed by technology.

K N I G H T F R A N K V I E W S O N C O R P O R AT E R E A L E S TAT E ( C R E ) M A R K E T

Shishir BaijalChairman & Managing Director Knight Frank India

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K N I G H T F R A N K V I E W S O N C O R P O R AT E R E A L E S TAT E ( C R E ) M A R K E T

K N I G H T F R A N K V I E W S O N FA C I L I T I E S & A S S E T M A N A G E M E N T S E R V I C E SOFFICE RESUMPTION ACTIVITIES COMPRISES THE KEY ASPECTS AND BROADLY COVERS

— PEOPLE, PROCESS, WORKPLACE AND TRANSPORTATION

PEOPLE

• Ten days prior to opening the offices, it is important to identify list of Critical staff for Cleaning, M&E, EHS, Security and ascertain their health conditions and ensuring their origin is not from HOT SPOTS

• Make sure the required uniforms, PPEs are provided and maintain adequate stock

• Provide regular training to the FM team on the activities post lockdown preparedness and to follow regular workplace hygiene practices.

PROCESS

• Site specific office resumption check list is to be ready

• Ramp up plan for employees to report in phased or shift manner till government revokes full restriction

• Ensure safe and secured entry process for employees. Restrict visitors till COVID chain is broken

• Process of employee temperature screening to be continued, especially the use of Thermal Cameras for touch-less measurement of temperature is recommended

• Ensure required inventory for critical spares and consumables

• Display posters on DO’s and DON’Ts at all visible places and circulate the same through electronic medium as well

WORK PLACE

• Deep cleaning and sanitization of complete offices before reopening

• Check all workstations for power and data connectivity

• Maintain social distancing in workplace including meeting rooms and cafeterias to ensure 2 meters distance.

• Impose compulsory usage of PPE including face masks and gloves. Provide separate dust bins with covers for disposal

• Encourage employees to use staircases instead of lifts and restrict to 50% of lift capacity

For further information and business queries please contact:

Sathish Rajendren Chief Operating Officer Facilities & Asset Management Services Knight Frank India

• Avoid employee engagement, social events and employees movement in-groups specially in the common areas. 100% No Smoking zone

• Task force team to regularly monitor the employees’ behavioral aspects and educate through various training sessions

• Not to hold evacuation mock drills till the COVID free environment prevails

• Emergency response procedures, continual awareness programs and training sessions to be run virtually

• Large IT parks should think of having an ambulance for emergency and provide an Isolation rooms for short time holding of suspects. Medical Facilities including paramedic staff to be kept available on call basis when needed

TRANSPORTATION

• Option of asking employees to come by their own transportation is recommended case by case, to avoid risk of exposure

• Sanitization of cabs in the beginning of every trip and ensure availability of Hand sanitizer

• Restrict to 40-50% of loading

• Impose compulsory wearing of nose masks and gloves while travel

• Ensure Drivers hygiene and PPEs with vigorous training on Do’s and Don’t’s

• Check Drivers temperature before getting into work

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K N I G H T F R A N K V I E W S O N P R O J E C T M A N A G E M E N T S E R V I C E S

K N I G H T F R A N K V I E W S O N O F F I C ET R A N S A C T I O N

• Entire construction industry will experience marginal slowdown

• Corporate Fit-Outs may have to revise their plans

• Key considerations for clients likely to be health, safety and welfare of their teams, and the need for social distancing

• Some workplace solutions that can be cost effectively implemented in the short term for that returning workfaorce

- Reduced Densities and goodbye to the typical working day- Consider going to a four-day work week and staggering teams across five days to reduce density by up to 20 percent on any given day

- Assigned Unassigned Desks- Transition to unassigned seating that allows employees to establish boundaries enables distancing

- Respect the individual- Assign lockers, file drawers or storage cabinets to individuals to separate personal items. Remove trash cans from individual desks and replace them with a communal location that consolidates sanitation.

- Ability to control cleanliness- make it easier for employees to maintain proper hygiene, especially when it comes to washing and sanitizing their hands. Additional sinks in kitchens and break rooms offers one solution

- Humidity Control- Increase humidity levels to 40 to 60 percent to reduce infection

- People and Culture -Introduce HR policies that consider remote work on a need based and longer-term basis

- Healthcare- Design standards followed in healthcare sector will also apply to corporate workplaces

- Risk Assessments- Undertake risk assessment of the premises in consideration of Covid19 and in particular what operations involve touch

COVID IMPACT ON RENT ESCALATION, MARK TO MARKET

OPPORTUNITY

The India office market continues to offer value on the global platform. While the weighted average rent in 2010 was INR 45 per square feet (psf), today it is INR 75 psf. Therefore, in dollar terms, the rents are comparable over a 10 year period. However, the developer pedigree has improved remarkably over the decade with an upgrade in construction quality, and India continues to have the demographic advantage to attract technology-based, global companies. Thus, the fundamentals for growth of the office business remain sound, although not without difficulty over the next few quarters.

As compared to the 2009 – 2011 period, when there was significant over-supply and the ownership was entirely promoter led, today, the ownership of Corporate Real Estate is partly or fully institutionalised, held between 15 to 20 institutional developers across the country.

The CRE market has very low vacancies and limited new supply coming up till 2022. Therefore, class A assets will be resilient to rent correction at least for another quarter (April – June 2020).

Once companies define their new strategies, occupants may come back and ask for favourable terms, but a significant drop in rentals is unlikely, especially with the possible delay in construction activity pushing back new supply. Attempts for renegotiations of rent by companies will be led by the status of the company’s business and balance sheet, ownership of the asset and value of replacement assets to seek cheaper rental in the existing submarket.

Corporates looking at savings on real estate cost may have to let go space or shift the micro markets to lower price destinations. They may also look at class B assets in the same micro– market which may not meet all compliance standards. However, by moving in the same submarket, the replacement cost with OP-EX and new CAP-EX may not lead to substantial savings.

STATUS OF TRANSACTIONS TODAY

Many occupiers have postponed major leasing decisions. Deals, however, have not been cancelled. Though landlords are open to discuss early renewals, when the renewals come up, Knight Frank India expects tenants to be reluctant in accepting an increase in rentals.

We may see developers and landlords being more receptive in about 3 months, when there may be greater clarity on demand contraction.

For further information and business queries please contact:

Deben Moza Executive Director - Head of Project Management Services Knight Frank India

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For further information and business queries please contact:

Viral Desai National Director - Occupier Services Knight Frank India

FORCE MAJEURE

For leased offices, landlords believe that Force Majeure does not apply as tenants’ security. Facilities management staff and even a few employees may have been on site. Supplies like water and electricity were uninterrupted, and Work from Home remained possible because the servers were secure and processing. Knight Frank’s advice for corporates and developers is to work together as litigations do not help.

DEMAND FORECAST FOR CURRENT CALENDAR YEAR

While it is too early to put down a number, we can guestimate with present and past data. Arithmetically, around 70% or more of the world’s working population has been at minimal business activity for the last 2 months. This may continue for another quarter at least. We, therefore, expect a contraction of demand as compared to last year and in the same proportion as on date.

A parallel can be drawn from the Great Financial Crisis (GF) of 2008-09 when absorption was recorded at 32 million square feet (msf). The absorption dropped by 34% to 21 msf in 2010 and bounced back to 30 msf in 2011.

The upward trend continued thereafter, to reach 37 msf in 2012, and last year absorption was recorded at 60 msf.

In 2008-09, we did not have new age sectors like E-commerce or co-working and a majority of the technology companies did not exist either. India has the ability to bounce back due to our favourable demography as well as friendly ties with advanced world economies. While it is not easy to quote an absorption number at this stage, office absorption will be reassessed as per business strategies. CRE is a strategic enabler to business and will continue to be paramount for employee engagement and motivation.

WORK FROM HOME AND ITS IMPACT ON DEMAND

COVID- 19 has led to some extraordinary times and pushed us to move indoors irrespective of the nature of our business. Today therefore, employees are constrained and a general slide in economy has instilled in them a sense of job insecurity. Just about 5 weeks ago, working was all about collaboration, but today, it is about isolation. We should remember that humans are social animals and employees too, in many ways, are dependent on offices, not just for salaries but also for social interaction.

Having said this, even as normalcy returns, many corporates globally are likely to create greater ability to work from home on a more permanent basis. For a large percentage of Work from Home employees, companies will have to ensure that they are continually motivated. There will be other constraints too like the Indian joint

family structure, weather conditions, unstable power and internet bandwidth. Yet, we believe up to 10% of business may be WFH.

SPACE MATRIX

Space utilization matrix will also change. Over the last few years, the focus has been densification or reduction of per employee space allocation to ensure rational use of office space. However, with the COVID – 19 pandemic making ‘social distancing’ an important aspect of daily life, Knight Frank believes this trend may reverse to ‘de-densification’ and indeed, increasing the space between employees.

SUSTAINABLE AND ‘WELLNESS’ BUILDINGS WILL BE IN DEMAND

Buildings with sustainability and wellness features will grow in importance and be definitive of a high-quality property along with facility management; this will become a determinant of space decision.

New buildings will be designed keeping in mind the need for health and wellness, eg. contact-less elevators doors. The number of levels in a building, washrooms, taps, cafeteria etc too will be altered. Another major change that is likely to take place is adoption and increased use of HVAC products to influence air quality and ventilation.

OTHER TRENDS

Unlike the earlier trend of consolidation, occupiers may look at splitting up offices to have them in different locations.

A consolidated, centralised office may not be suitable for business continuity and may need CRE strategies to include dispersed, localised, accessible and sustainable offices in the future. A number of co-working companies may face cash flow issues and be compelled to surrender spaces.

A demand for furnished and/ or managed spaces may increase, as companies may not want to spend on CAPEX. This will benefit the top 4 to 5 managed office space providers with ready inventory. Large developers may look at providing furnished offices and be ready to amortise the CAPEX over 5 years, but with a lower lock-in of 3 years.

K N I G H T F R A N K V I E W S O N C O R P O R AT E R E A L E S TAT E ( C R E ) M A R K E T

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© Knight Frank India Pvt. Ltd.

This report is published for general information only and not to be relied upon in anyway. Although high standards have been used in the preparation of the information analysis, views and projections presented in the report, no responsibility or liability whatsoever can be accepted by Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document.

As a general report this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank to the form and content within which it appears.

CIN No. – U74140MH1995PTC093179