Table of Contents
It was in March 2020, when prime minister Narendra Modi announced a nationwide lockdown, to combat the Coronavirus pandemic. Following this, the stock market came crashing down. One of the worst affected were real estate indices, which were already in distress, due to a liquidity crunch and slowdown in overall demand.
On July 17, 2020, the year-to-date return of BSE Realty Indices was -32.3%, which may get worse if the situation does not improve in the near future.
Real estate stocks are still bearish
While the initial days were tough for all infrastructure companies, some of the leading players came out without seeing much impact from the shock of the COVID-19 crisis, by quickly switching to technological innovations to keep their sales pipeline intact. Big real estate players, such as Embassy and Brigade, saw a quick rebound due to a partial increase in warehousing demand and encouraging annual results for FY20, respectively. Godrej Properties remained stable, owing to promising marketing efforts. Sobha Developers too rallied 15% in the month of June, when it announced that it sold 4.07 million sq ft during FY20, the highest ever total sales volume. Other prominent developers, such as DB Realty and Emami Realty, are facing a challenging time at the stock market, due to lower sales volumes. In fact, Omaxe touched a 52-week low in June, when most of the players were seeing some improvement in their stock market performance. According to experts, this was the result of one lender, Venus India Asset-Finance, invoking equity shares held by one of the promoters of the group.
Is consolidation in real estate likely?
Due to the shortage of liquidity in the market, organised real estate players are looking at consolidation, to strengthen their market presence. Recently, a subsidiary of Prestige Estates acquired 25% stake in DB Realtors, a group company of DB Realty. Earlier, Embassy Group had proposed to merge around 11 real estate projects with Indiabulls Real Estate (IBREL) and to take control of the merged entity. Embassy owns 14% stake in IBREL. Piramal Enterprises is also looking for new investors, to raise funds for completing its half-built real estate projects.
Since COVID-19 has impacted the cash flows of developers, the more established players will be looking to increase their market share. According to ICRA, large real estate players with strong balance sheets and adequate cash, will be better positioned than the smaller players who are finding it difficult to cope with the crash in the market.
In the pre-COVID-19 scenario, sales were already leaning towards developers with established track records and quality project completion, which resulted in large, listed players reporting healthy collections in the previous year.
While some developers with project portfolio flexibility have come out with customised payment structures, to make their products more attractive and to offload sales inventory, the traction will be significantly reduced, due to economic uncertainty, job losses, etc. As a result, cancellations are expected to increase for recently-launched projects, thereby, impacting the overall cash flows for most developers and might need refinancing to meet outflows.
Factors that will affect real estate stocks in future
- Real Estate Investment Trusts (REITs) may face a challenging time ahead, due to concerns over the demand for office space, as several companies plan to continue with the remote working model to battle the COVID-19 situation. It should be noted that IT companies are major clients of REITs. This could be assessed from the fact that Embassy Office Parks has corrected around 30%, as on July 14, 2020, trading 12% above the issue price.
- A number of multi-national corporations are picking up quality office spaces, to welcome back their employees in the post-COVID-19 era. Morgan Stanley, Netflix, ByteDance and MetLife are some of the companies to lease office space in the last month. The trend may improve the outlook for commercial property developers such as Puravankara, Brigade, etc.
- Housing sales and new launches have plunged in the last three months in top Indian cities. The nationwide lockdown severely impacted the real estate sector. This includes both, luxury and affordable housing segments. The disturbance in the construction materials’ supply chain and rising input cost, along with non-availability of labour, will continue to affect the segment in the coming months as well, even when the lockdowns are lifted in most of the cities and re-enforced in cities that witness a surge in Coronavirus cases.
What is a REIT stock?
REITs or Real Estate Investment Trusts are companies that finance income-producing real estate properties.
Is it good to invest in real estate stocks?
Real estate and stocks can provide long-term gains but both come with risks.
Is real estate better than stocks?
Under the right circumstances, real estate offers risk-free and better returns and also greater diversification.