The impact of a new and alarming variant of the COVID-19, Omicron, on the real estate sector will be entirely dependent on the severity of the infection, and the resultant announcement of lockdown/s. Health experts opine that while the Omicron variant does not seem to have manifested serious symptoms so far, nothing could be said conclusively till we have more data. The realty industry has not seen any immediate impact on on-site visits, new bookings, and launches so far. But with Delhi Government announcing a yellow alert and UP resorting to a state-wide night curfew, we might be heading to an economic slowdown, once again. Omicron could lead to a continuation of the real estate trends reported during the previous two waves. Meanwhile, the new COVID-19 variant has raised concerns across the country, considering the spike in the number of cases in metro cities, especially Delhi, Mumbai, and Chennai.
Punit Agarwal, Managing Director (MD) and Chief Executive Officer (CEO), of the Nirvanathe 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 the enquiries, 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. Industry experts are of the opinion that the recovery will be highly dependent on the way India deals with the second wave of Coronavirus and carries out the mass vaccination programme.
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 the report, the pandemic resulted in a serious liquidity crunch for real estate developers. The credit shortage brought down 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 sales will remain hampered until the COVID-19 situation is controlled effectively. However, the new project launches across India increased by 71 percent between January and June 2021. (Source: Knight Frank). This boost in new launches can be attributed to the stamp duty reductions in various States.
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 drives by the Government picked up the pace, the sudden spike in cases across the nation since February onwards did not bode well for the recovery cycle, and the occupiers remained cautious in the Apr-Jun 2021 quarter. Resultantly, the potential leasing transactions were further delayed and impacted leasing rates.
Already, the net leasing rates dipped by 33 percent in the last year, and the average commercial property prices have declined by 7-10 percent. Blackstone Group, one of the largest office space owners in India, had stated last year that the COVID-19 outbreak had delayed project completion timelines, reduced demand, and softened rentals.
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 38 mn sq ft of flexible workspace in the next one year. Occupiers’ Survey by CBRE reveals that the adoption of technology and renewed business practices have rekindled investors’ interest in the commercial real estate space.
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, retail mobility has declined by 55-60 percent across India. However, riding on the positivity lent by the mass vaccination programme, the retail segment has witnessed a sharp recovery at 72 percent of the pre-pandemic levels in July 2021.
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. Jitendra Khaitan, Managing Director, of 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 affected the industry a little because, after the first lockdown stage in April 2020, people realised the value of home ownership. There will not be any 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 assistance on other support facilities, such as processing papers for home loans, registration of sale deeds, 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.
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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 aluminum 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.
In the year 2021, developers and manufacturers are more positive since they are better prepared to handle the crisis. Pritam Chivukula, Co-Founder and Director, of Tridhaatu Realty, avers, “The current scenario might not be a concern for 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 their sites, the small developers and those undertaking redevelopment projects may not have enough space for labour camps.”
Ashok Mohanani, President, of 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 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 into 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 came 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 provided shelter and food to their workers, some also sponsored their Antigen and RTPCR tests, along with other medication and healthcare costs. Developers were keen on sponsoring the vaccination of their labours on priority.
Commenting on the well-being of construction workers, Niranjan Hiranandani, National President, of NAREDCO, says, “Across construction sites, safety precautions were taken, and protocols were followed compulsorily. Testing was conducted every 15 days. The opening up of vaccination for 18-year-olds and above has positively impacted construction site workers. The vaccination process has boosted the confidence of the entire sector. Also, it will increase the safety level at construction sites, and will go a long way in dealing with the second wave of COVID-19.”
Predictions for the year
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. Though the recent upsurge in COVID-19 cases in various pockets of India (especially Maharashtra) had compelled the investor community to remain in a cautious mode, the declining number of cases and resurgent homebuyers’ interest has paved the way for a sustainable recovery.
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 financial institutions to avoid risky investments. This could add to the woes of the already cash-strapped real estate sector. However, all-time low-interest rates and stamp duty reductions in various States will help in boosting the housing demand. Moreover, the completion timeline extensions provided by State RERA authorities have provided additional time for project completion to the real estate developers.
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 favorable year ahead. - Rohit Gupta, CEO, Mantra Properties
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, the speed of the vaccination drive, and the sense of structural changes will only boost investors' confidence in the sector.
In the words of Sanjay Jain, Managing Director, of 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 the 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 buyers' enthusiasm to own a flat/home is even higher compared to the last three months. Thus, we are extremely positive to achieve superior sales figures compared to earlier months.”
Impact on REITs
Real Estate Investment Trusts (REITs) are directly dependent on rent-generating real estate assets. As the second wave of Coronavirus had clouded 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 had predicted that the recovery of the REITs and commercial office spaces market will be delayed. However, signaling a robust recovery, the Indian REITs have witnessed a strong rental collection of over 99 percent in Q1 FY22.
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 (NRIs) to invest in real estate has been rental returns. However, the uncertainties fueled by the pandemic across the world have 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 reduced 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. 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 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 Non-Banking Finance Companies (NBFCs) crisis, the real estate sector has dealt with the challenges head-on. Though the recovery is certain, the second wave has slowed down the process. Moreover, with the anticipation of the third wave in the offing, there might be some impediments and challenges for the sector to deal with. However, a lot depends on the expeditiousness of the vaccination drive and the measures taken by the Government to boost the real estate revival.
