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Consolidation to be the new normal for the real estate sector post COVID-19

Not all real estate firms will be able to weather the storm leading to large scale consolidation. It would first hit smaller towns and gradually shift to metros

Will real estate survive the economic impact of the lockdown? The answer is ‘yes’. Once the economy rebounds, it will enhance demand for commercial real estate which in turn will drive growth in other segments of the sector, including residential, which is already witnessing some changes in the post-COVID-19 world.

The ‘new normal’ in the COVID-19 era in terms of problems and prospects, translates into a radically changed situation for the economy, real estate is one sector where existing challenges have been enhanced as a result of the pandemic.

To ensure survival and growth, ‘last mile funding’ for stressed, delayed and incomplete projects awaits quick resolution while a one-time roll-over to restructure debt as also extension of moratorium along with a quick-fix of the broken supply chain are new entries to the ‘must-do’ list.

In the post-COVID-19 world, the first requirement is survival, and while the authorities have done well so far, more needs to be done – and at the earliest.

To begin with, ‘need for low cost credit’ tops the list of challenges which need quick resolution. Industry organisations like NAREDCO have suggested allowing more institutions to offer Alternative Investment Fund (AIF), fulfilling stress fund requirements up to Rs. 1,50000 crore as also reduce cost of borrowing for NBFC and non-NBFCs - measures which would result in ensuring low-cost credit supply.

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A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

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Along with things fiscal, there is also an urgent need to kick-start the ‘impacted by lock-down’ economy, by enhanced spending on infrastructure.

To return to the previous point, this needs a larger quantum of low cost Infrastructure financing. Economists have suggested raising funds for infrastructure development through government disinvestment. Other suggestions include encouraging the PPP model, implementing InVits on asset maturity and encouraging the bonds market, as also measures to attract FDI and domestic investors.

Enhanced infra development will boost demand for raw materials, which will not just boost their supply and turnover, but will also generate employment and attract further investment. The cascading effect of these will be positive as regards GDP growth, while the enhanced ‘last mile connectivity’ as a result of the infra activities will help in decentralisation and opening up new markets for real estate development.

India can follow the examples of developed nations like the USA, Germany, UAE and Singapore, among others, where enhanced Infra development led to higher GDP growth.

Homes will now be designed to enhance safe and secure living in the post-COVID-19 world, location of choice will no longer be ‘proximity to workplace’, but about being in open, green spaces.

From being largely about residential, Indian real estate has evolved to include emerging asset classes, which will attract not just end users but also investors. Data centres and logistics parks are prime examples. Data centres will grow as a result of the Data Protection laws as also the Prime Minister’s ‘Digital India’ initiative. The supply chain disruption has enhanced existing demand for robust growth in logistics.

In the aftermath of the pandemic, logistics and light industrial will be a win-win combination for setting up logistics and light industrial parks. These two segments, with other new segments, will enhance the commercial real estate growth story, replacing traditional ‘growth drivers’ like office spaces and retail spaces.

As humankind comes to terms with ‘co-existing with Corona’, segments in commercial real estate will witness a rebound in demand. Not all work can be ‘from home’, many industries need actual workplace to operate at full capacity and effectively, which will result in work spaces witnessing demand.

As safety measures related to the pandemic become the new norm, activity will resume at work spaces. The post-pandemic world will see demand for larger floor plates to ensure social distancing and safety; while bringing different industries back to work from offices.

Real estate has quickly evolved in response to the pandemic; the digital revolution is evident. From planning and conceptualizing to design, architecture; from marketing to sales and on-line transactions, digital is the platform that drives real estate.

Indian real estate has adapted to the new norm of business operations, digital. The future of real estate is along expected lines, the buzzwords being building information modelling (BIM), internet of things (IoT), augmented (AR) and virtual reality (VR), big data analytics, 3D-printing, cloud solutions, block chain technologies and smart automation concepts. These have been integrated in future business models, as Indian real estate structures and plans for both, the near and distant future.

The new ‘prop-tech’ will enable changing gears for Indian real estate sector, working in the digital era. Obviously, development of alternative business models will become essential for growth of real estate business.

As for problems and prospects post-COVID-19, the reality of real estate will be consolidation. A change is waiting to happen and it would be guided by survival of the fittest.

Post the pandemic, buyer sentiment has been impacted.  We are witnessing a slowdown in terms of scheduled and time-bound payments from existing customers as also a drop in numbers of new customers as a result of the economic slowdown due to Covid-19.

Job insecurity, job losses, reduced salaries, savings and business volumes  have all disrupted cash flows to the real estate business. Not all real estate organisations will be able to weather this ‘stormy situation’, and I foresee large scale consolidation as the result. It will begin from smaller towns and gradually shift to metros.

It will be all about having ‘deep pockets.' The big players will have the capacity to survive the long haul. Effectively, this will further accelerate the ongoing trend of consolidation in real estate and we would see larger, more established players gaining increased market share in the post- COVID-19 world.

The author is president (National) NAREDCO and Assocham
Niranjan Hiranandani
first published: Aug 26, 2020 03:25 pm

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