The impact of Coronavirus on the Indian real estate sector was stifling to the point that it brought property transactions to a near-halt last year when the nation went into a complete lockdown between March and June 2020. Since then, the market has taken several strides towards recovery, and just when it seemed the revival was not far, the country has been struck by yet another wave of the virus, this time, far more fatal. Experts say the recovery of the realty market in India could now prolong until 2022.

From halted construction activities to a mass exodus of migrant workers, the year 2020 was a watershed year in the history of economic downturns. From negligible homebuyer enquiries and site visits to incessant curbs on the construction activities, the crisis caught the real estate sector unawares. After a series of lockdowns and restrictions, the country started to get back on its feet by July 2020. The pandemic forced the real estate sector to employ digital business strategies, which led to a rapid transformation of sorts. Resultantly, the share of virtual site visits increased manifold within a span of 2-3 months.

Punit Agarwal, Managing Director (MD) and Chief Executive Officer (CEO), Nirvana Realty, shares his opinion of how the second COVID-19 wave has affected the Indian real estate sector. 

Experts anticipated that the market could recover completely in 2021, given that enquires, site visits and sales had started nearing the pre-COVID levels in most cities. However, the resurgence of Coronavirus in a more lethal form by March 2021 sparked fears far worse than the last year. With several cities like Mumbai, Pune and Delhi NCR undergoing partial lockdowns, and masses struggling for healthcare, the realty sector has seen another blow. Buyers have retracted once again from conducting site visits, thus slowing down property transactions. The industry experts are of the opinion that the recovery will be highly dependent on the way India deals with the second wave of Coronavirus.


The scale of impact till now


The unprecedented scale of the impact of COVID-19 on Indian real estate can be gauged from the fact that the sector has incurred a loss of over Rs 1 lakh crore since the pandemic broke out (Source: KPMG). According to a report by KPMG, the pandemic resulted in a serious liquidity crunch for the real estate developers. The credit shortage brought down the residential sales from four lakh units in 2019-20 to 2.8 lakh units in 2020-21 across the top seven cities of India.

If a report by India Ratings (Ind-Ra) is referred to, the overall residential demand declined by over 40 percent in H1 of FY21. The agency believes that the sales will remain hampered until the COVID-19 situation is controlled effectively.

The restricted movement and cautious buyer sentiment translated into an unprecedented increase in the unsold inventory as well. According to a report by Liases Foras, the COVID-19-led lockdown resulted in a surge in unsold inventory from over 15 quarters at the end of FY-20 to over 19 quarters towards the end of H1 FY21. The unsold stock got exacerbated by abysmally low sales in Q1 and dampened recovery in Q2 2020.

Impact of COVID-19 on commercial and retail real estate in India


In addition to the effects on residential sales, the work-from-home concept also proved detrimental to the growth of office space leasing companies. According to a report by Cushman and Wakefield, the net leasing of office spaces declined to around 35 lakh sq ft in Jan-Mar 2021 from approximately 70 lakh sq ft in the corresponding period of the year 2020. Since Q4 closed on a positive note as the immunisation drive by the Government picked up the pace, the sudden spike in cases across the nation does not bode well for the recovery cycle, and the occupiers are expected to remain cautious in the coming months. Resultantly, the potential leasing transactions may get further delayed and impact leasing rates.

Already, the net leasing rates dipped by 33 percent in the last year, and average commercial property prices have declined by 7-10 percent.

The demand for flexible workspaces, which had resurged in the last few months, has also taken a hit yet again. If the market recoups well in time, experts anticipate leasing of 38 mn sq ft of flexible workspace in the next one year.

The retail segment has been hit badly in the second phase as consumers are wary of visiting malls and shops. According to data compiled by Statista, owing to the partial lockdowns and curfews across cities, the retail mobility has declined by 55-60 percent across India.

Blackstone Group, one of the largest office space owners of India, had stated last year that the COVID-19 outbreak had delayed project completion timelines, reduced demand and softened rentals. The same is expected to repeat if the number of cases do not reduce within a month or two, or if the lockdown extends beyond a month.

Impact of COVID on property prices


So far, the effect of the second wave of the pandemic has not translated into a price movement in the residential market. Like the last year, developers continue to withhold prices due to limited profit margins. While liquidity constraints may weaken prices in the long-term, any possible impact in the short-term is highly unlikely.

The real estate developer community is hesitantly positive but cautious at the same time. Sounding a positive note, Jitendra Khaitan, Managing Director, Pioneer Property Management Ltd, says, "In the past eight months, since the Coronavirus-induced lockdown was lifted, the real estate industry has witnessed a gradual recovery. The second wave of COVID-19 would have little effect on the industry because after the first lockdown stage in April/May 2020, people realised the value of owning a home for themselves. We do not expect a drastic drop in real estate prices as a result of the second wave, but there will be some domino effects. Not directly because of COVID-19, but because of the related constraints imposed on the general public's movements and delayed delivery of other support facilities, such as processing papers for applying for home loans, having the agreement for sale or flats registered, or reaching out to sales and marketing personnel to garner more information about the project."

Despite a positive hope due to the vaccination drive, the year 2021 is expected to remain challenging for the real estate sector, if not a complete washout.

Impact on the construction industry and migratory workers


Not only the real estate sector but the allied industries dependent on the construction sector also inflicted heavy losses during the year 2020. On average, 250 small and medium-sized businesses, such as aluminium panels, steel bars, construction machinery parts, and many others are directly related to the real estate industry. All of these industries reported losses in 2020 along with an increase in costs, further hampering sales.

This year, developers and manufacturers are more positive since they are better prepared to handle the crisis. For instance, Pritam Chivukula, Co-Founder and Director, Tridhaatu Realty, avers, “The current scenario might not be a concern of the large and medium-sized developers as much as it would be for smaller developers. While the established players are already taking necessary precautions at the sites, the small developers and those undertaking redevelopment projects may not have enough space for labour camps.”

Ashok Mohanani - President, NAREDCO Maharashtra, adds, "After the record spike in COVID-19 cases, the next phase of vaccination to those above 18 years of age is a great move by the Government. It will boost the construction activities as it will help the labourers to get vaccinated at the earliest. We hope that the vaccination drive will be expedited further, mitigating the risk factor. We had requested the Government to allow the vaccination drive for labourers between the age-group of 20-45 years as most of the labourers fall in that age category. It will also address the issue of reverse migration as after vaccination, the labourers will feel safe.”

Safety of workers on construction sites


Several developers have come ahead and claimed that labourers are the most vital and integral part of real estate development and that taking utmost care of them is their paramount responsibility. While a few of them are providing shelter and food to their workers, some are also sponsoring their Antigen and RTPCR tests, along with other medication and healthcare costs. Developers are also keen on sponsoring the vaccination of their labourers on priority.

Commenting on the well-being of construction workers, Niranjan Hiranandani, National President, NAREDCO, says, “Across construction sites, safety precautions are being taken, and protocols are being followed. Testing every 15 days is mandatorily being done; the opening up of vaccination for 18 year olds and above will also impact construction site workers in  a positive way. The vaccination process will ensure that testing every 15 days will not be needed. Also, it will increase the safety level at construction sites, and will go a long way in ensuring COVID-19 protection at construction sites.” 

Predictions for the year 2021


The year 2021 was slated to be a year of recovery, and the confidence was seconded by the vaccination drive rolled out by the Union Government. However, the recent upsurge in various pockets of India (especially Maharashtra) has compelled the investor community to remain in a cautious mode.

The availability of credit for the real estate sector has emerged as one of the key factors hampering the expansion. The already uncertain environs fueled by the recent resurgence of the pandemic have compelled the financial institutions to avoid risky investments. This could add to the woes of the already cash-strapped real estate sector.

"In the wake of the second wave of Coronavirus, the realty sector is volatile, but it will tide over the worst and will continue to deliver. Consider the year 2020, when we were all under lockdown. However, the realty sector saw an upsurge in demand for housing, and by Q2 and Q3 of 2020, it surpassed pre-Covid levels of residential demand. Going forward, millennials will lead the demand, but we expect that NRIs will be looking to invest back home too. These are encouraging trends and have set a strong momentum in the realty sector despite the pandemic. FY21-22 seems promising as we see positive growth in Q1, but to sustain it, the second wave of the pandemic needs to subside. Overall, we still expect a favourable year ahead."                                                                                                                             -Rohit Gupta,CEO, Mantra Properties

Further, lockdowns and restrictions on construction activities are certain to affect the scheduled delivery of real estate projects across the nation.

According to a report by Knight Frank, the Private Equity (PE) investment in the real estate sector in 2020 stood at around $4 billion. This was significantly less than the PE investment in 2019 at around $7 billion. The report highlights that the taming of the resurgent second wave, clarity on vaccination drive and sense of structural changes will only boost the investors' confidence in the sector.

In the words of Sanjay Jain, Managing Director, Siddha Group, "The collective experience of the year bygone has taught people the importance of owning a property. Hence, last year, once the restrictions were lifted, people started investing, shedding the hitherto ‘wait-and-watch’ approach.

In the year 2021, real estate players have refrained from offering festive schemes and have not promoted their projects in media, thinking that the interest of the customers may not be as high as it was as in previous years because of the resurgence of COVID-19 and rising uncertainties.

However, contrary to the expectations, we have found that buyer's enthusiasm to own a flat/home is even higher compared to the last three months. Thus, we are extremely positive to achieve superior sale figures compared to earlier months. Having said that, effective control over the resurgence will have a direct effect on the investors' confidence. As the lockdowns are also leading to job losses and pay cuts, the picture will be cleared once the pandemic is tamed and the infection rate is brought down.”

Impact on REITs


Real Estate Investment Trusts are directly dependent on the rent generating real estate assets. As the second wave of Coronavirus is clouding the prospects of a gradual recovery of the office market, the future of REITs will be coterminous with the effective control of the wave. The Indian commercial real estate market has seen a 47 percent decline in net absorption, YoY, in Q1 2021. While the green shoots were visible in January 2021, the recent resurge of the lethal virus has delayed the recovery of the office market.

A report by ICICI Securities predicts that the recovery of the REITs and commercial office spaces market will be delayed to September 2021 (earlier prediction was July 2021). The current trend of office occupiers downsizing and delaying the expansion as well as new leasing decisions is expected to continue in the near term.

However, owing to a limited number of large office space developers, the long-term resilience of the commercial office market can be anticipated. As of March 2021, India had over 488 mn sq ft of Grade A office stock and several global investors are planning to invest in REITs.

According to JLL, with more REITs to be listed in 2021, the REIT market will enter an era of prolonged growth. The number of sellers and buyers will broaden significantly, further increasing the market liquidity in the longer run.

NRI investment in real estate amid COVID-19


The primary purpose of Non-resident Indians to invest in real estate has been for rental purposes. However, the uncertainties fueled by the pandemic across the world has motivated the NRI community to own a home in India as well. With deposit rates falling in the range of 6-7 percent, and the declining value of the rupee against the US Dollar, the NRIs are actively looking for investment opportunities in the Indian real estate market.

The pandemic has fostered the use of virtual visits, and this has enabled the NRI community to browse, select and invest in real estate online.

According to leading research reports, the NRI investment in Indian real estate in FY 2021 stood at $13.3 billion. This is over six percent higher in comparison to the previous year. However, in the wake of the second wave, a segment of the NRI community has also started selling the already owned properties amid the second wave and the resultant fear of uncertainties. However, this might not be termed as a pan India trend as NRIs who have invested in Pune, Mumbai and Bangalore have preferred to stay invested. In fact, Bangalore has emerged as the most favourite destination for NRI investors.

Moreover, the NRI investment in the Indian real estate sector is expected to reach $15 billion in FY 22.

All in all, the real estate industry is not new to challenges. Be it the slowdown of 2008 or the infamous NBFC crisis, the real estate sector has dealt with the challenges head-on. Though the recovery is imminent, the second wave might shift it by another six months if not controlled effectively.