The Prospects of Real Estate Sector in India during COVID-19
While the entire world is facing the trouble created due to COVID-19, the impact also has been felt in the real estate sector. A health emergency created out of the pandemic has inspired businesses to perform work from home experiment at a global level. Also, it has raised a big question mark for the need of work spaces after the end of COVID-19 era.
The unprecedented adjustments due to pandemic have also brought tectonic shifts in the Indian real estate ecosystem. A holistic approach for safety, wellness, health and hygiene is going to overpower the other considerations for evolving the real estate sector in both aspects-physical as well as commercial.
The video discussion was held with Anuj Puri, who is the Chairman and Founder of ANAROCK, one of the topmost real estate companies found in India with diversified interests around the real estate value chain. He has over 30 years of experience in Indian and global real estate markets and is a trusted adviser to developers, occupiers, investors, and the government. The discussion was conducted by Ninad Karpe, partner 100X.VC. They spoke of the COVID-19 pandemic and the resultant impact on the real estate sector and what’s in store for the sector in the future.
COVID-19 and the Immediate Impact on Real estate Market
Most organizations and companies have agreed to follow the policy of zero contact meetings and no visitors. It has made the real estate sector uncertain about its future but also optimistic at the same time. Rarely any sector exists today that has not been impacted by COVID-19, but for the Indian real estate industry, the impact of the crisis can be gauged precisely at the moment.
It is tough to imagine any business that has not been impacted by the COVID-19 pandemic. While speaking on the topic, Anuj mentioned that the entire real estate sector had undergone a tremendous change due to the current pandemic situation. He also mentioned that more than wealth destruction, there also has been productivity loss. All the real estate segments, whether it is commercial, retail, residential, hospitality, or industrial, have been adversely hit by the crisis. Below are some valuable insights provided by him on the current scenario:
A huge negative impact can be seen in the office segment in real estate. An estimated 42 million sq.ft. of leasing activity was to happen at the beginning of the year as compared to 40 million sq.ft. last year. Due to the unexpected period of COVID-19, it is now limited to around 28 million sq.ft. largely. Mainly because the U.S. corporate will not take that much space as of now because of WFH activity and shrinking of the economy worldwide.
The worst-hit can be seen on the retail segment that can contract to about 50% from 9 million s.q. f.t. to 4.5 million s.q. f.t. basically because of problems like the closure of retail malls, casualty to retail players and lack of adequate returns out of huge debts and also due to disruption of the supply chain.
There is a combined approach related to residential spaces. There were great demands from the side of home buyers to purchase new residential homes out of pay-cuts and pandemic situations. The current situation allows you to worry more about personal well-being and health rather than buying a home. On the other hand, there are also some positive sides to this pandemic in this sector. "The security associated with owning a physical asset during such a crisis has resulted in increased demand," he says. Also, low rates for home loans are attracting home buyers to buy homes. The idealistic preferences have changed during this crisis due to uncertainties, the volatility of the stock market and ambiguities of the financial sector. Most tenants are potential home buyers, as told by Anuj. This is because many landlords are forcing their tenants to vacate their home.
Post lock down, the home buyers will gravitate towards good developers who have delivered quality projects in the past and have a genuine reputation in the market. Quoting data from Capital Economics which tracks the number of property sales across 30 major Chinese cities, Anuj said that, in China, about 5000 apartments used to sell in a day in the pre -COVID-19 era whereas during COVID-19, the number went down to zero. Post-COVID-19, the signs have been encouraging wherein the numbers rose to 3000 apartments a day.
As far as industrial real estate space is concerned, there is a great opportunity that is noticed by Anuj. He said that innumerable queries are coming up from U.S. corporate who are more inclined to have plants and offices and outsource their manufacturing to India from China. They are exploring more to understand whether India can provide similar quality of service, infrastructure, and ease of permissions to set up or migrate their offices and plants from China. Apart from this, warehousing space did pretty well during COVID and post lock down when the e-commerce activities have surged; this sector will continue to be robust.
On the capital front, Anuj said that it is evenly poised for the Indian retail sector. The FDI investments are looking for cheaper assets, and it is a tussle between the home country and India. Speaking on the fiscal measures taken by the government, he was positive about the clause regarding consideration of the pandemic as a force majeure under RERA and providing relief to the real estate developers. Under this, the government has provided an extension of 6 months for the completion of ongoing projects.
Expectations from the government
Indeed, there are expectations from the side of the government to provide interim relief that will help the real estate sector to re-ignite the economic cycle. Anuj pointed out certain measures that will provide some comfort to builders and home buyers:
According to him, the COVID-19 impact on overall economic activity is likely to increase and sustain for a prolonged period, which would result in a more significant impact on developer cash flows and project execution abilities, leading to wider credit negative implications. Hence, there is a requirement of loan moratorium by the financial institutions on all term loans. It is also going to reduce short-term liquidity issues and also help developers and potential home buyers as well.
Central and state governments are to bring procedures such as time-bound incentives; it may be a reduction in stamp duties or other similar measures.
The other anticipation is a reduction of GST and interest paid for home loans which should be made tax free.
Q & A
What are your views on Prop-tech?
According to Anuj, digitization of the real estate sector is the anticipated future of this industry. Due to COVID-19 pandemic, the prolonged lock down has resulted in constrained customer movement to project sites and thus leading to delayed purchase for the home. The staff of developers has also been restricted to work from home. Moreover, customer visits may result in virus spread. Hence, new ways have to be adopted to engage customers in moving forward.
What correction will we see in the home buyer market in Mumbai?
There is no doubt that correction will happen in the home buyer market but that will also depend on the developer as well as the product present in the market. There are few stable developers with large cash flows who will sail through the period without reducing the prices.
On the other hand, there are a large number of other developers with lesser cash flows and in need of money who will find it difficult to tide through. We may expect discounts from these developers, but people should keep a check on the end usability of the money whether the money is being used for construction or otherwise. As per Anuj, we can expect 15% of correction in the home buyer market this year.
What are your views on Co-working space?
Anuj specified four things on the co-working space:
These office spaces need to be sanitized properly.
Corporate want dispersed offices, i.e. offices close to people's homes to avoid travel and any eventualities due to COVID-19.
Density in these places needs to go down, and therefore business models need to be revamped.
Support of private equity in the co-working space.
What about the financial stress perspective in real estate?
Anuj’s view is that there will be a consolidation of projects rather than developers shortly to combat the expected financial stress. He also expressed concerns about the projects in the northern part of India, which may face problems shortly due to financial stress.
Will there be investments in luxury residential projects or commercial spaces?
Anuj is quite skeptical about investment in luxurious residential or commercial space. However, he said that investments might happen in smaller offices in sub-urban areas.