Impact of Coronavirus on Indian real estate

While the adverse effects of the pandemic is already being felt across the world, varying opinions are emerging with regards to Covid-19’s impact on real estate, a health emergency that has force launched the biggest ever work from home experiment globally, putting a question mark on the relevance of workspaces in a post Coronavirus world

Amid countries applying extreme measures to contain the Coronavirus outbreak, businesses have come to a grinding halt across the world, forcing monetary agencies to slash their growth forecast for the global economy. While the adverse effects of the pandemic is already being felt across the world, varying opinions are emerging on Covid-19’s impact on real estate, a health emergency that has force launched the biggest ever work from home experiment globally, putting a question mark on the relevance of workspaces in a post Coronavirus world.

India, where the economic growth is already set to slow down to a record 11-year-low, the 21-day lockdown announced on march 24, 2020, would further worsen the situation in Asia’s third-largest economy. As is evident, research agencies are predicting a near-term halt in growth of real estate in India. PropTiger.com data shows housing sales in India’s nine major cities declined by 30% in the period between October-December 2019 as the festive season failed to revive consumer sentiment, which took a severe beating because of large-scale delays in housing projects and increasing cases of builder insolvency.

“Several measures launched by the government in the past to revive realty growth seem to have made little impact. Considering it’s a major contributor to overall growth, which hit 4.5 per cent in the July-September period, we expect further assistance from the government which would nudge buyers to invest in realty,” Elara Technologies Group CEO, Dhruv Agarwala said in a statement.

On the contrary, deal volumes in office space in India increased 27% year-on-year in 2019, to an all-time high of over 60 million square foot, showed a Knight Frank report. “The historic rise in the office transactions is a significant growth indicator for the office market as it represents the continued commitment of domestic and global corporations in the country’s growth potential despite the ongoing economic slowdown,” Knight Frank India CMD Shishir Baijal said in a statement.

However, any predictions made before the sudden outbreak of the global calamity stand retracted as the government gets busy devising plans to stop businesses in general and the economy in particular from sinking deeper into a slump, amid impending fears of the rupee declining to a low of Rs 78 against the US dollar.

While the real extent of the damage is hard to grasp in a scenario where every day is making a great difference, one thing is for certain – India’s realty would suffer short term shocks on account of the contagion.

 

Housing market in India’s top 9 cities (October-December 2019)

SalesDown 30%
Project launchesDown 44%
Inventory778,627 units

Source: PropTiger DataLabs

 

Covid-19: Impact on Indian housing market

The Coronavirus spread has further delayed a recovery that might have seemed possible because of various government launched measures to revive demand though right now it doesn’t seem like prices will go down immediately. Niranjan Hiranandani, national president, NAREDCO, states that “Salvaging Indian realty, the second-largest employment generator is critical, not only from the GDP growth perspective but also for employment generation, since the sector has a multiplier effect on 250-plus allied industries.”

The centre in the recent past had announced higher tax breaks and lower interest rates on home loans to make purchases more lucrative, apart from setting up an Rs 25,000-crore stress fund for stuck projects.

The demand slowdown in the residential segment has already curtailed housing sales, project launches and price growth in India’s residential realty sector, which has been reeling under the pressure caused by mega regulatory changes caused by the Real Estate Regulatory Authority (RERA), the goods and services tax (GST), demonetization and benami property law.

 

Impact of Coronavirus on Indian real estate

 

According to rating agency ICRA, the pandemic, if not contained soon, would not only significantly impact the economy but also adversely hit developers’ cash flows and project delivery capabilities.

“In case of a longer outbreak though, the impact on overall economic activity is likely to be deeper and more sustained, which would result in a more significant impact on developer cash flows and project execution abilities, giving rise to wider credit negative implications,” ICRA said in a recent note while also adding that the three-month moratorium announced by the RBI on March 28 on loans will provide some comfort to builders.

“The injected liquidity of Rs 3.74 lakh crore (by the RBI) along with the three-month moratorium on all term loans by financial institutions will alleviate short-term liquidity concerns and help developers as well as homebuyers . It is a big relief for developers and buyers to help them mitigate the challenges faced by them currently,” says Ramesh Nair, CEO & Country Head of JLL India.

Expecting delays in project completion and extending support to the builder community, the real estate regulatory authority in Maharashtra has announcement of a 3-month extension in project completion timelines.

Recall here that real estate developers in Mumbai, the state capital and India’s financial nerve centre, also have the highest unsold stock among the top nine markets.

“Due to the 21 days’ lockdown announced on account of the COVID-19 outbreak, both, construction and sales activity, have come to a complete halt across the entire real estate sector. On several sites, construction workers, too, have gone back to their hometowns. Even after the lockdown, activity will only recommence gradually, which will cause project delays of anywhere between 4 to 6 months at the least,” said Sharad Mittal, CEO and head, Motilal Oswal Real Estate Funds. Welcoming the MahaRERA’s announcement, Mittal added that while this may might not completely compensate the sector with the actual project delays that are likely to be witnessed, ‘it is most definitely a decision in the right direction, to support real estate developers and the sector as a whole, in this global crisis’.

 

Covid-19: Impact on homebuyers in India

If low interest rates (home loan interest rates are at 8% now) and high tax exemption (rebate against home loan interest payment is as high as Rs 3.50 lakh per annum) were going to make a change in the consumer behavior, the Coronavirus outbreak is likely to halt that shift, at least in the near to medium term.

As it is, site-visits by prospective property seekers are becoming out of question for the time being, postponing purchase decisions. “With the Coronavirus pandemic impacting all sectors of the economy, troubles have compounded for India’s realty sector which has been dealing with a ‘challenging scenario’ since the economic and policy reforms were introduced. The slowdown since February-end is apparent; and while site visits are almost non-existent, the decision-making process is hugely delayed,” says Hiranandani.

The fact that businesses would scale down their workforce would also force many prospective buyers to wait for clarity on their job security before making a final decision on property purchase.

Even though the RBI has announced a 75-basis-point repo rate cut to bring it down to 4.4%, any positive effect of the move on buyer sentiment would be seen only in the medium to long term. The step, however, would come as a major support for existing buyers, who might struggle to pay EMIs in the short-term because of the lockdown and in the medium terms in the event of job loss.

 

Impact of Coronavirus on Indian real estate

 

Covid-19: Impact on builders in India

Slump-hit builders were pinning their hopes on government support to shed the increasing unsold stock even as an ongoing crisis in the country’s non-banking finance sector, a key source for housing sector funding, made borrowing extremely difficult, jeopardising their plans to deliver projects within the promised timeline.

Developers were sitting on an unsold stock worth approximately Rs 6.1 lakh crore as of January 2020, show PropTiger.com. Near-halt on construction activity amid a lockdown in India to contain the virus and delay in supply of manufacturing material and equipment from China, will further push delivery timelines of ongoing projects, consequently increasing the overall cost for developers. Through furious efforts, China, the country where the virus originated, has been able to bring the pandemic to heel, with workers joining offices. However, as the situation in India worsens, builders here will be forced to postpone orders.

The government is expected to launch support measures for the developer community in order to offset the losses they will suffer on account of the Coronavirus spread, including allowing the force majeure clause to skip penalties over project delays. The three-month EMI holiday for developers during the crucial period is one measure to offset their losses.

“The pandemic menace has hit at a particularly sensitive time. Across realty companies, this is the time when statutory payouts and streamlining of balance sheets happens. In this challenging time, we have asked the government for some economic interventions like rescheduling loan repayments, a one-time rollover for debt restructuring and deep interest rate cut,” Hiranandani added.

 

Covid-19: Impact on office space in India

Companies worldwide have announced remote working for employees to contain the virus spread, triggering a debate if work from home could replace office spaces in future. While the answer to that question depends on the ultimate level of success achieved by businesses through remote working, a near-term jolt to the commercial real estate in India is unavoidable.

“Office utilisation rates will fall as remote working increases and landlords with exposure to short-term leases are the most vulnerable as delay to investment activity and softer rental growth than previously forecast are headwinds to 2020 performance,” said JJL’s report, titled COVID-19 Global Real Estate Implications. “Co-working operators in particular may be at risk if members decide to cut short-term contracts; hybrid operators with more secure medium-term income will be less exposed,” the report added.

While stating that the demand for remote working and investment in collaboration technologies would grow, fast-tracking a widespread adoption of these practices, the report, however, says that this trend can’t be perceived as a threat to the future office demand. “A focus on higher utilisation and densification of space has already driven efficiencies and resulted in limited excess space in optimised portfolios. Rising employment in relevant sectors will more than outweigh any impact on demand from home-working,” the report says.

 

Covid-19: Impact on mall developers in India

The anxiety surrounding the virus spread resulted in footfall in malls in India reducing by half before the government ordered a complete lockdown. If the situation persists, how would it impact mall developers?

“Low footfalls and subsequent closure of malls will impact developers’ debt servicing against the project. Even a relaxation from banks for the short-to-medium term should not have a big impact. However, if the virus scare continues beyond one to two quarters, debt servicing challenges may last for a longer period,” points out Rohan Sharma, research head, Cushman and Wakefield. “Post the advisory withdrawal when malls are open to the public, footfalls will likely limp back to normalcy as people will take time to regain confidence to throng public places in large numbers. This will also bring a fundamental shift in how mall owners will now look at their properties. An increased focus on air quality, improving hygiene and sanitisation and awareness is what will bring back people to their malls,” Sharma adds.

“The impact of Covid-19 in the form of shutdown of retail outlets and malls as also entertainment and fitness centers has put commercial real estate deals on a wait-and-watch mode,” points out Hiranandani.

 

Indian real estate after Coronavirus: Top 11 projections

  1. Site visits to drop, impacting sales numbers.
  2. Project completion deadlines to extend, pushing completion farther.
  3. Overall cost of project to increase amid delays and supply constraints.
  4. Inventory levels to increase, intensifying pressure on builders.
  5. Prices might move slightly upwards despite the slow demand.
  6. Home loan interest rates to fall after repo rate cut to 4.4%.
  7. Remote working to gain traction in future as businesses embrace work from home culture.
  8. Higher investment likely in future office spaces to make them better prepared for crisis situations.
  9. Occupancy levels in office spaces to decline in the near term as remote working picks up.
  10. NRI investment in real estate may improve amid rupee fall.
  11. Cases of builder insolvency might increase as liquidity situations worsens.

 

FAQs

Will COVID-19 impact home sales?

Housing sales might see a drop in the aftermath of the virus outbreak as businesses might cut jobs to offset losses.

Will COVID-19 impact property prices?

Prices might not undergo any significant change as the overall cost of projects is likely to increase.

 

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