Max Estates Limited (Max Estates) was established in 2016 with a vision to bring the Max Group’s values of Sevabhav, Excellence and Credibility to the Indian real estate sector, which continues to face a significant trust deficit owing to unscrupulous practices, lack of transparency and inadequate regulatory oversight. In addition, the sector also continues to be a laggard in the adoption of digital technology that has the potential to drive operating efficiency and customer experience. Max Estates intends to capitalise on these opportunities, owing to the widespread acceptance and recognition of the Max brand, as well as its track record in innovation and execution quality.
Over the last few years, Max Estates has demonstrated end-to-end expertise across the real estate value chain including sourcing new opportunities, liaisoning, project execution, asset management and operations. Our current portfolio is targeted to expand at 0.5 to 1 mn sq. ft. per year for the next 3 years.
Our flagship development, Max Towers has been a testimonial for Max Estates’ capabilities. Max Estates was able to bring the project out of distress, demonstrating a sound understanding and capability of the real estate licensing and regulatory apparatus. Further, Max Estates completed the project within tight timelines and budget. Nearly 60% of the total building was leased within the first year of its launch at a 25-30% premium to the prevalent rental in its micro-market.
Max Towers, a Grade A LEED platinum commercial office development, stands tall at the entrance of Noida on the Delhi-Noida Direct flyway
Further, it has attracted an enviable tenant profile primarily from the central business districts of New Delhi and in turn has redefined the commercial real estate landscape of Noida in terms of product quality, tenant profile and rental realisation. Max Towers is a LEED Platinum Green building, setting the bar for sustainable development in the office space sector.
At Max House, Phase 1 of the development is in progress. Factoring in some delays due to the lockdown, the first phase is now expected to be completed and ready for handover to potential tenants in Q2 of FY 21.
The last few years have been remarkable for commercial real estate in India both from the perspective of demand-supply trend as well as foreign investment. There has been a steady rise in global occupants as the quality of commercial assets has improved. Foreign Direct Investment has also seen a tectonic shift from residential to commercial with the share of commercial growing from 33% in FY15 to 70% in 2019. Industry estimates of the Indian real estate market, prior to the COVID-19 outbreak, were projected to be $ 650 Bn by 2025 and $ 1,000 Bn by 2030.
In its first phase, Max House, Okhla, a contemporary office development in the heart of New Delhi, is now welcoming occupiers
COVID-19 has further highlighted the problems of the already beleaguered Indian residential real estate while hitting the pause button on the booming commercial realty cycle. It is likely to dampen the housing demand, which was already tapering for the past few quarters and developers might defer launches until the festive season. Retail consumption, which too was struggling due to muted economic growth, will be further impacted as consumers curtail discretionary spends and practice ‘social distancing’. Office spaces, while presumably the fastest one to recover, will have to contend with slowdown in leasing decisions in the coming two quarters.
In the near term, we expect the real estate sales and leasing activities to be slow considering the uncertain economic outlook. However, we believe companies with strong balance sheets, a credible brand and a portfolio focussed on Grade A commercial office segments are not only best placed to weather this storm but will also convert the crisis into an opportunity and emerge a winner.
The Indian commercial office sector has been growing with corporate expansions-led space absorption reaching a peak in calendar year (CY) 2019. Major occupiers committed to large spaces to accommodate their ambitious growth plans. Despite a global slowdown earlier this year due to a trade war, the Indian office market remained insulated as occupiers looked to expand their operations. The ability of Indian cities to offer sub-dollar rental values for ITES companies and sub-one and half dollar rental values for IT companies drove consistent growth in leasing. The net absorption in top 7 cities was recorded at 40 Mn sq ft. in CY 2019, growing by 19% over CY 2018. New completions also kept pace with rising demand and stood at 46.5 Mn sq. ft.in 2019, recording a 21% yearly growth. Overall vacancy remained almost stable at ~14 % by 2019-end.
However, this growth is unlikely to be carried into the current year. Amidst the pandemic and the global health crisis, the demand for office spaces is likely to drop. As many occupiers may not be able to assess the impact until the situation is resolved, they will re-evaluate their position. While businesses might experience a significant slowdown, the expansion or consolidation plans may also be shelved. Net absorptions in FY 20 as estimated by several International Property Consultants is expected to drop by 17% to 34% from pre COVID-19 estimates. However, it is important to note that this may not necessarily lead to a price reduction since supply is also expected to be impacted by the same magnitude in lieu of balance sheet stress and liquidity crunch for several developers as well as a delay in construction due to disruptions in availability of labour and material.
Amidst this, on a micro level, we believe Grade A supply will be few and far in the micro markets we are currently present, and demand will migrate from strata-sold to developer-managed and operated Grade A developments keeping in mind Employee Health and Safety (EHS) considerations.
The total revenue earned by Max Estates during the year was ₹378.58 Cr., with an operating profit of ₹32.22 Cr.. The Company has secured lease commitments of ~1,40,000 sq. ft. of office and retail space in Max Towers.
222 Rajpur is Max Estates’ luxurious residential community of 22 villas located in Dehradun
The total revenue earned by Max Estates during the year was ₹378.58 Cr., with an operating profit of ₹32.22 Cr.. The Company has secured lease commitments of ~1,40,000 sq. ft. of office and retail space in Max Towers. We pride ourselves in having several marquee names in our tenant profile. These clients have moved in from central business districts, reaffirming our core belief that occupiers are looking for modern and healthy environments to WorkWell. We have also commanded 25-30% premium as compared to other assets in the vicinity of Max Towers. Additionally, just prior to the lockdown triggered by a global pandemic, the Company was in the advanced stages of discussion on pre-commitment of ~40% of office space in Phase 1 of the Max Towers, Okhla project. We expect these discussions to resume post lockdown as clients start to settle down in their respective businesses. The Company has been able to sell ~60% of the inventory in its Dehradun project (222 Rajpur). Owing to the poor overall sentiment in the luxury residential market, the offtake of the project has been slower than expected.
We believe that the real estate business, particularly commercial real estate, is cyclical and heavily dependent on the economic progress of the country. Hence, Max Estates has chosen to remain nimble-footed, keeping itself net debt free as on March 31, 2020.
On the project execution front, the completion of Max House will be delayed by 2-3 months on account of the lockdown and is now expected to be ready for handover to tenants in Q2 of FY 21. As for Max Square, we have received several approvals (e.g., AAI, Fire). We are confident of recouping the loss in timelines due to the lockdown and bring the asset online as originally planned by end of Q4 of FY 22.
Politician and celebrated author Shashi Tharoor takes stage at the Max Towers auditorium as part of Hunar Charcha. Such events are a part of of Max Asset Services employee and community engagement program called “Pulse”
With slowing GDP growth rates, the US-China trade war and the fallout of Britain from the European Union, the global economy was already in a precarious place in FY 19. A global pandemic has further exposed the risk of a global recession in FY 20. At the time of writing this note, a severe demand shock was underway across the globe as discretionary spends are curtailed owing to rising unemployment and lockdown restrictions. In such a scenario, developers with financial muscle or with access to foreign direct capital via partnerships with financial investors can navigate these waters better than the unorganised developers.
While the impact of COVID-19 will result in the deferral of leasing decisions in the near term and as overall demand for commercial office space is expected to fall in FY 20, we continue to remain positive with respect to the attractiveness of commercial office space in the medium to long term.
The trend towards ‘Work from Home’ may structurally lead to lower demand for office space but the magnitude of the impact is yet to be ascertained. While there are multiple predictions in the wake of the current pandemic, we believe that the impact ultimately may not be as substantial as currently being predicted. While there are several positive aspects of ‘Work from Home’ including reduction in travel time, there are several limitations as well for this to become the most prominent model on how work gets delivered such as the suitability of Indian homes for a permanent working model, concerns around employee mental and physical health, issues with data confidentiality, among others. Having said that, with the successful adaptation of work from home during the crisis, it has proved to be a solid backup option from a business continuity perspective.
At the same time, there are positive forces that can offset the negative impact on the demand for office space. For example, de-densification (higher space per employee) and portfolio diversification (hub and spoke model) to reduce the distance between office and home will drive the need for office spaces but spread out to multiple locations within a city.
In addition, the current pandemic and its impact on the bottom-line of companies is expected to strengthen the trend to outsource/offshore business activities to India. Particularly, companies from Europe which currently constitute only 10-12% of the total office demand in India should increase their share along with several U.S. companies which do not yet have their Global In House Centres (GICs) in India. Parallely, sectors like Over-the-top (OTT), medical-technology, health analytics, gaming, pharma and FMCG companies are likely to do well and hence, generate demand for new office space.
Lastly, occupiers will attach a significant premium to developer owned and managed Grade A facilities to ensure Employee Health and Safety. At Max Estates, as a relatively new player in the space, we are ready to adapt to the evolving external environment and customer preferences to navigate through the current crisis and consolidate our position in the industry.
In light of COVID-19 concerns, Max Estates’ experienced asset management team implemented the best workplace measures and protocols in India for screening, sanitisation, air filtration, social distancing and others to ensure that Max Towers allows for a safe working environment without impacting productivity and collaboration.
While we expect some delays in leasing decisions by occupiers due to the COVID-19 pandemic, our business development and leasing teams have productively used the time during the lockdown to get a digital toolkit ready (e.g., virtual video based interactive tour) as well as curating innovative office space solutions (e.g., Zero capex plans) recognising the needs of office occupiers to relocate and diversify office portfolios while conserving cash and protecting employee health and safety. In fact, we closed a large leasing transaction (~25,000 sq. ft.) at Max Towers during the lockdown expedited by the need of the client to upgrade to a well-managed asset.
Max Estates aspires to be the most preferred brand in providing real estate solutions at scale in India over the next decade. In its first growth horizon, Max Estates will continue to focus on expanding its commercial office footprint in NCR, building a portfolio of annuity yielding assets.
As a strategy for commanding premium on rentals, Max Estates will differentiate itself along the quality of its product. We believe that while micro markets are very different – with diverse price points and tenant profiles – there is still a dearth of quality products to meet demand. Hence, Max Estates will strive to deliver a superior quality product catered to each of the micro markets we enter. This will entail intelligent product specifications, material choices and superior design built around the micro market tenant requirements backed by time-bound execution. Further, while product specifications and associated costing will be customised to the micro market economics, elements such as compliances, safety, finishing and sustainability will never be compromised.
Our office assets will not only be developer-owned, but also developer-managed. Our operating vertical, Max Asset Services, will not only provide facility management services, but also curate conveniences for a superior tenant experience and develop a strong relationship with them through collaborating on events across personal and professional development, wellness, performing arts and sports to enhance their overall experience in keeping with our WorkWell philosophy. Even during the lockdown, the team continued to engage the tenants at Max Towers through a series of online events such as yoga and meditation classes, health and nutrition classes as well as storytelling and art classes for kids amongst others.
Max Estates has proven its capability on design differentiation with Max Towers and will continue to leverage its design capabilities, customising them to each micro market we operate in. Our focus will be on creating flexibility around tenant space requirements (floor plates that can cater to both initial and subsequent expansion needs of tenants), longevity and futureproofing the products for technology innovation and work culture, sustainability and tenant experience. Further, Max Estates will continue to employ best-in-class technologies to ease execution and design development and to minimise execution risk and duration. In light of the expected changes driven by the pandemic, we are reviewing Max Square design and will ensure that the requisite changes (e.g., HVAC related) are incorporated.
Max Estates will continue to focus on the office space segment in FY 21, while adopting an asset-light approach. We have partnered with New York Life Insurance Company as 51:49 partners for our upcoming project – Max Square.
We will continue to strengthen leasing, liaisoning and construction capabilities to effectively serve across a range of micro markets within NCR with a wide spectrum of rentals, demand mix and regulatory landscape.
We will opportunistically try to leverage our strong balance sheet and our partnership with New York Life to pick suitable opportunities. We are also in discussions with several funds and providers of equity capital for our future investments.
While continuing to maintain a lean corporate set-up, we will continue to invest in building organisational capacity, including leadership bandwidth in sync with the scale and scope of our current and aspired real estate portfolio.
While pursuing the longer term aspiration of becoming a preferred brand that provides real estate solutions, Max Estates will continue to scan the market and prioritise potential opportunities to diversify into new asset classes.
Max Estates will continue to focus on the office space segment in FY 21, while adopting an asset light approach. We have partnered with New York Life Insurance Company as a 51:49 partner for our upcoming project – Max Square. We plan to grow our asset base through more such partnerships in the future. We are in active discussions about several growth opportunities across the National Capital Region (NCR) with a positive bias towards Gurugram. Simultaneously, several financial institutions and real estate funds have expressed their interest in partnering with a brand like ours for commercial real estate opportunities. We believe the current situation will bring several distressed assets into the market, and Max Estates is well placed in terms of technical know-how and capital to absorb some selectively.