Impact of Work from Home and Rise of Coworking Spaces on the Bengal Real Estate Sector

The COVID-19 pandemic had forced the world to undergo an overnight change with respect to the way it conducted both its personal and professional lives. It brought about boom in some industries, such as e-commerce, ed-tech, etc. and stagnation in others such as travel, hospitality, etc. The real estate industry also underwent some drastic changes, which has affected various stakeholders.

Encouraging Government Interventions

In the recently convened National Conference of Labour Ministers of all States and Union Territories, the Prime Minister said that “flexible workplaces, a work-from-home ecosystem, and flexible work hours” are the needs of the future. Another development with a similar vision of flexible workplaces was the Special Economic Zones (Third Amendment) Rules, 2022 and the Special Economic Zones (Fifth Amendment) Rules, 2022.

On 14th July, 2022, notification no. G.S.R. 576(E) was published by the Ministry of Commerce and Industry, Government of India promulgating the Special Economic Zones (Third Amendment) Rules, 2022, which permitted work from home for Special Economic Zone (“SEZ”) employees and solidified the legal framework of work from home and remote working. By this notification, Rule 43A was added to the SEZ Rules, 2006 which enabled employees (including contractual employees) to work from home or from any other place outside the SEZ up to a maximum of fifty percent of the total employees of the SEZ Unit. It extends to employees of the IT and ITes SEZ units, employees who are temporarily incapacitated, employees who are travelling and also employees who are working offsite. In order to avail itself of this, the SEZ Unit had to submit its proposal for working from home to the Development Commissioner through email or physical application at least 15 days in advance.

However, on 8th December 2022, the Ministry published another notification bearing no. G.S.R. 868(E), bringing about the Special Economic Zones (Fifth Amendment) Rules, 2022, which granted further relaxations to the SEZ work from home norms. By virtue of this amendment, the percentage of employees who can work from home has been increased from 50% to 100% till 31st December 2023. It is also no longer mandatory to get prior approval of the proposal for work from home, and the SEZ unit owners are only required to intimate the same to the Development Commissioner.

Due to pandemic/lockdowns, most officegoers started working from home or remotely. Although remote working existed even before the pandemic, especially among freelancers, it was because of the pandemic that most businesses were forced to adapt to this mode of working even for full-time employees. Although the world is back to normal at present, both employers and employees are refusing to go back to the traditional office setup. The December 8, 2022 notification will now further encourage IT companies and their employees to opt for work from home in the SEZs.

 

Increase in Demand for Residential Spaces & Shifting of People to Tier 2 And Tier 3 Cities

Another interesting trend that has come out of this pandemic is the increase in demand for bigger residential spaces, including luxurious and semi-luxurious apartments. As per the reports of CREDAI, Bengal, the sales of 2 BHK apartments have gone down from 48% in 2019 to 40% in 2021, while on the other hand, sales of 3 BHK apartments have gone up significantly from 44% in 2019 to 54% in 2021. The sales of 4 BHK apartments have also more than doubled during the same period, going up from 2% in 2019 to 4.7% in 2021. This increase in demand for luxurious residences has taken place since individuals who work from home prefer an apartment with a home office, and therefore, they are leaning towards larger residential spaces.

 

The demand for residential real estate is highly dependent on where people go to work, as people prefer to live near their workplaces in order to minimise travel. Now that a large group of people are not required to physically to work regularly, they are shifting to tier 2, tier 3 cities and suburban areas from the metro areas as these places offer affordable housing options and a better standard of living at a lower cost. The tier 2 cities across India have witnessed healthy investment in residential real estate in recent years, with more residential project launches by developers.

 

Rise of Co-Working Spaces

As a result of the change in mindset of employers and employees, a new form of commercial real estate has gained popularity recently, namely, “co-working spaces.” A lot of companies, especially small businesses and start-ups have opted for this model across India instead of investing in individual spaces, as it offers both cost-effectiveness and flexibility. Some of the reputed coworking spaces, such as Colliers, Awfis, Coworks have already set up spaces in different cities across India. Due to this huge demand for coworking spaces, companies such as Awfis, Workport Coworking, East India Works Eden, My Cube and Seamus Management have already set up coworking spaces in Kolkata.

 

Future Trend

Now that offices are transitioning from work-from-home models to hybrid models and some workplaces are also calling their employees back to the office, the demand for office space and coworking space transactions has started to pick up again. Although the employees of the IT/ITeS sector in SEZs still have the liberty to work from home, most employers in other sectors have mandated that employees come back to the office. It will be interesting to see if the volume of rentals and leasing in office spaces goes back to the pre pandemic conditions or is affected by the rise of “co working spaces” and the new notification dated December 8, 2022 allowing 100% work from home in SEZs until December 31, 2023.

 

Now that offices are transitioning from work-from-home models to hybrid models and some workplaces are also calling their employees back to the office, the demand for office space and coworking space transactions has started to pick up again. Although the employees of the IT/ITeS sector in SEZs still have the liberty to work from home, most employers in other sectors have mandated that employees come back to the office. 

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The DESH Bill 2022 has the Potential to Change Our “Desh”

After India enacted the Special Economic Zones (SEZ) Act in 2005 and the rules governing SEZs came into effect in 2006, about 378 SEZs were notified. However, as of March 2022, only 268 of these were operational; the government has de-notified those SEZs that were not functional. In her last budget speech, Finance Minister Nirmala Sitharaman announced the government’s intention to revise the legislative architecture relating to SEZs. She cited lack of demand as a reason and also the fact that significant changes to taxation and incentive regimes in the past decade have made the existing notion of SEZs much less attractive. Further, a couple of years ago, the WTO ruled that the tax-related incentives given to SEZs violated global agreements on subsidies.

The Context of the DESH Bill 2022

 

The biggest reason why India’s SEZ regime needs a relook is because the business environment has changed substantially in recent years. The SEZ regime was originally intended to promote exports so that we could earn valuable foreign exchange. The existing SEZ regime has undoubtedly benefited the Indian IT industry, and this has contributed hugely to building our foreign currency reserves. However, with IT/ITES company business and delivery models changing to include greater on-site delivery capabilities, the sheen has worn off. Also, the manufacturing sector has not been able to leverage SEZs to deliver as much export-based economic benefit as was expected. Change was therefore needed, and this is why the government has been planning a thorough revamp of the existing SEZ system.

 

This is the Right Time for Change

With a number of disruptive events accelerating global shifts in supply chains, investment-intensive manufacturing capabilities in new sectors are becoming critical for India. It is also important to boost trading and other services beyond IT. It has become even more important to look at new ways of attracting capital to complement our demographic strengths. Also, rather than continue to cluster economic activity in certain urban areas, what India needs is more broad-based activity across various states. Only strategies that enable all this will accelerate job creation and hence socio-economic growth and development in India.

This is the context in which the government of India plans to introduce the Development of Enterprise and Service Hubs (DESH) Bill in the ongoing monsoon session of Parliament.

 

Broad Contours of the DESH Bill 2022

The DESH Bill seeks to encourage the creation of two types of hubs: one for services and the second for other enterprises. The former will have requirements for built-up areas and allow a broad range of services-related activities (including R&D), while the latter (which can house manufacturing and/or services), will have land-based area requirements. Both types of hubs can be created by the government (Centre/States), jointly, or by any registered goods and services provider. The idea is to encourage private sector investments to serve the domestic market and not just exports. The expectation is that greenfield or brownfield projects will encourage the creation of infrastructure in non-urban areas.

The Bill proposes to simplify ease of doing business by enabling single window clearances (both central and state). The bill will also make the hubs WTO compliant (tax incentives will be delinked from exports). However, some indirect tax benefits are expected to be provided. It is also likely that businesses operating from these hubs will be allowed to utilize idle capacity to service domestic customers (unlike SEZs that could only export).

What is known about the DESH Bill 2022 so far indicates that the central government is keen to use it as an instrument to activate three key levers of economic growth:

  • Creating infrastructure of the scale needed to become a global manufacturing and services hub – especially as western countries are looking at alternatives to China and other countries (even smaller ASEAN nations and some in Latin America and Africa) are positioning themselves as viable destinations at least in niche sectors. (Some of China’s hubs are more than 250 sq km in area, while Indian SEZs are hardly ever more than 2.5 sq km. Chinese hubs are fully integrated towns with well-developed infrastructure and linkages to ports, airports etc. This explains the huge difference in scale between Chinese hubs and those anywhere else in the world – a gap that India is keen to bridge).
  • Leveraging India’s scientific/technical talent to innovate and leapfrog competition in areas that will become key not just for self-reliance (e.g., pharma, energy, electronics etc.) but also critical to our security (e.g., drones, space technology, composite materials, semiconductor chips etc.)
  • Fostering better cooperation and greater alignment between central and state governments (and inter se) so that outcomes such as employment generation and optimal resource utilization are not sacrificed on the altar of petty political differences or short-term gains.

Let’s hope the DESH Act will achieve all that it seeks to, and not become just another legislation that did not deliver to its potential.

*”Desh” is the Hindi word for “country”. It is interesting that many acronyms coined by the government are easy to remember because they mean something related in Hindi.

Image Credits: Photo by Jesper Giortz-Behrens on Unsplash

The Bill proposes to simplify ease of business by enabling single window clearances (both central and state). The Bill will also make the hubs WTO compliant (tax incentives will be delinked from exports). However, some indirect tax benefits are expected to be provided. It is also likely that businesses operating from these hubs will be allowed to utilize idle capacity to service domestic customers (unlike SEZs that could only export).

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