India, where the economic growth is already set to slow down to a record 11-year-low, a prolonged lockdown— which started midnight of March 24, 2020 and was eventually extended till June 07, 2020, amid a dramatic rise in the number of infections — worsened 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 show housing sales in India’s nine major cities declined by 26% in the period between January-March 2020.
While deal volumes in office space in India increased 27% year-on-year in 2019, to an all-time high of over 60 million sq ft, the growth momentum in India’s commercial segment is also likely to get derailed due to the virus attack.
Any positive predictions about its growth 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.
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.
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), demonetisation and the benami property law.
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. This moratorium was subsequently extended by the RBI, on May 22, 2020, till August 31, 2020.
Expecting delays in project completion and extending support to the builder community, the government has also said developers could get project deadlines extended by six months through the RERA citing the force majeure clause.
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 lakh crores, as of March 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 has further pushed 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 rein-in the pandemic, with workers returning to offices. However, as the situation in India worsens, builders here are forced to postpone orders.
Several measures announced by the government in its coronavirus-specific stimulus package and the EMI holiday for developers during the crucial period are some steps that might offer some relief to the builder community.
COVID-19 impact on warehousing in India
On the assumption that e-commerce will grow significantly in the post-COVID-19 world, there have been projections that the warehousing sector in India would stand to gain immensely. More importantly, this growth will not be limited only to the big cities but it will be spread across smaller cities, as well.
According to property consulting firm Savills India, the supply of new warehousing space in 2020 could be only 12 million sq ft as against the earlier projection of 45 million sq ft. However, as the demand grows in the long term, a significant capacity increase could be expected in 30-35 new tier II and tier III cities.
COVID-19 impact on REITs
BTIG, an equity analyst firm, points out in its research that any substantial fallout from the novel coronavirus outbreak could lead investors to take a step back and readjust the value of Real Estate Investment Trusts (REITs). The pandemic could also prove to be a wet blanket over the sentiments of investors towards the REIT sector as a whole.
Some analysts suggest that a large-scale calamity could lead to occasional positive disruption in earnings for pioneering REITs such as the ones proposed to be established this year. However, sentiments would largely be negative for real estate fundraising of any kind, REIT fundraising exercises none the better.
Although Mindspace REIT (one of the major REITs) has filed a prospectus with the Indian market regulator, the Initial Public Offering (IPO) has been deferred amid the fear of tepid response due to the coronavirus pandemic. This indicates to the worrying possibility of this action being replicated.
A report by Edelweiss Securities says that although office space leasers benefit from the long-term nature of collaborations, such developers will have to work harder toward tenant retention and revenue stability as large corporations will insist on softer leasing terms amid the challenges initiated by the outbreak. According to a report by JLL, construction delays are imminent, and occupiers will take longer to make decisions, resulting in a 20-30 percent drop in leasing rates, directly affecting income sources of REITs.
However, despite all the negativity, a general sentiment among market stalwarts is that once markets start to open up, REITs and large commercial spaces will continue to be in demand due to an otherwise volatile stock market.
The Securities and Exchange Board of India (SEBI) – the capital market regulator, has offered temporary relaxations in compliance requirements for REITs in the wake of the pandemic. According to the initiative, the due date for completing regulatory filings and compliances for the financial quarter ending March 31, 2020, has been extended by one month, over and above all concerned timelines.
Additionally, SEBI has provided an extension of one month on the half-yearly compliance certificate on share transfer. REITs listed on the stock exchange can take a breather of three weeks on compiling results of the quarterly shareholding pattern, and a month on filing the annual corporate governance report. Owing to the viral outbreak, listed companies have a 45-day leeway, i.e. until June 30 to disclose fourth quarter and annual earnings.
COVID-19 impact on Private Equity (PE) investment
The impact of coronavirus on the investment scenario has started to come to the fore. Leading research reports are pointing towards a dismal investment sentiment in the Indian real estate space including the residential, retail and hitherto favourite commercial space.
According to the leading property consultancy firm, Cushman and Wakefield, private equity inflow in 2020 is expected to remain 45-50 percent lower from a year ago. However, exuding hope, it believes that the decline might be short-term as most funds must be realigning their investment strategies.
The post-COVID-19 scenario might also steer the investors towards relatively defensive assets such as logistics, warehousing spaces and data centres.
A recent analysis by Knight Frank also points towards a tough post-COVID-19 investment landscape. Major challenges such as withdrawal of funds by sovereign wealth and pension funds to offer bailout packages in their home country and the emergence of developed countries as a better investment destination due to fall in valuations. These trends might hit the private equity investment in the Indian real estate landscape in the shorter run.
While retail, residential and office spaces are to face challenges due to the rising trend of work from home, the warehousing segment is the shining star amid the black clouds. The sector is expected to attract domestic as well as foreign investment in the coming months and will outperform other asset classes in the Indian real estate.
In a bid to quantify the impact of coronavirus impact on the construction industry, KPMG has stated that the overall impact of novel coronavirus or COVID-19 on the construction sector can be estimated to be of over Rs 30,000 crore in the short term. The pandemic is also expected to reduce the investment in construction-related projects ranging from 13 percent to 30 percent. It will also affect the overall Gross Value Added (GVA) and employment generation capacity of the real estate sector.
The report titled ‘COVID-19: Assessment of economic impact on the construction sector in India’ further stated that as the construction sector is driven by infrastructure projects, the sudden inactivity will affect the business sentiment adversely. The primary reasons for the decline in sentiments are the present levels of uncertainty, dismal business outlook, tepid consumer sentiments, loss of income and the diversion of Government funds towards pandemic management.
The under-construction projects are staring at an average delay of two to three months which can extend up to one year. The report also noted that the labour costs for skilled workers are expected to rise by 20-25 percent while for the semi-skilled workforce; the cost will rise by 10-15 percent.