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Coronavirus impact | KPMG pegs loss in real estate sector at Rs 1 trillion by FY21-end

On the residential real estate market front, the credit crunch is expected to result in a contraction in residential sales across top seven cities to 2.8 lakh-3 lakh units in 2020-21 from 4 lakh units in 2019-20

Representative image
Representative image

The coronavirus pandemic has had a detrimental impact on most sectors and economies and the consequent loss to Indian real estate sector is projected at Rs 1 trillion by the end of FY21, a new report has stated.

Supporting more than 250 industries, the real estate sector in India will be temporarily handicapped by the ongoing pandemic. The prevailing outlook for the short term period panning the next 6-12 months may seem filled with ‘doom and gloom’, however the outlook for coming 12-24 months point to a steady recovery, said a report by KPMG India, titled, 'COVID-19: React, adapt and recover – The new reality May 2020 - A perspective on the Indian real estate sector'.

On the residential real estate market front, the credit crunch is expected to result in a contraction in residential sales across top seven cities to 2.8 lakh-3 lakh units in 2020-21 from 4 lakh units in 2019-20, it said.

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In the commercial segment, despite the lockdown scenario and subsequent easing of restrictions, the IT-BPM sector is anticipated to continue driving demand for office space, it said.

As much as 50-60 percent contraction in mall footfalls is expected from pre-COVID-19 levels, coupled with a significant downtick in overall trading density, it said.

Affordable and mid-income housing may get impacted due to fears of job loss

The short-term impact on the residential market would include pressure on sales within ‘silver lining segments’ of affordable and mid-income housing due to unemployment fears and deferred purchasing. However, in the medium term, it expects residential transactions to pick up in the second half of 2020.

Supply chain disruptions is likely to push up prices for raw materials. Limited room for passing on price hike and slow sales will lead to dampening of developer margins by 10-20 percent for pushing sales.

Closing agreements and relocation of slum dwellers to transit camps will be difficult during the outbreak, delaying slum rehabilitation related transactions.

Approval processes backlog to increase, slowing down overall development pace.

Long term impact of the pandemic may lead to changing trends in interior layout and designs, increased technology use and adoption of augmented and virtual reality.

IT-BPM sector is anticipated to continue driving demand for office space

COVID-19 outbreak is expected to reset the commercial space landscape.

IT sector is expected to perform moderately with lowest expected revenue growth in the last decade (0-2 percent). IT tenants likely to re-evaluate current operating models and focus on mitigating business risks through deferment and curtailment of non-core spends, which may significantly decelerate demand for commercial real estate from one of its core demand drivers, the report said.

India witnessed record levels of absorption in 2019 totalling 64 million sq ft, of which Information Technology (IT) and Business Process Management (IT-BPM) sector contributed around 32 percent. Operations within IT-BPM segment require workforce to be present in office or client locations and despite the lockdown scenario and subsequent easing of restrictions, IT-BPM sector is anticipated to continue driving demand for office space, it said.

Flexible workspaces across major Indian cities that accounted for 7 million sq ft in 2019 is expected to face major headwinds over the next 9-12 months.

Existing short lease terms, tenancy mix comprised mainly of start-ups and high fit-out capex requirements will compound business model challenges. Co-working real estate players may need to re-evaluate long term strategy for business continuity, the report said.

Proactive renegotiations are expected to continue going forward. Re-negotiation of rentals rates and/or deferment of lease payments arrangements are already being evaluated by occupiers and developers, the report said.

Expansion plans may be put on hold by developers due creating supply contraction. Anticipated REITs listing in FY21 may be postponed by 6-12 months, the report said.

Social distancing led changes to workspace may lead to higher space per employee requirement, efficiency based workplace utilisation models and rationalisation of available spaces. Demand for purpose built customised spaces may observe marginal uptake with increased preference for Built-to-Suit (BTS) commercial spaces to mitigate speculative construction based risks, the report said.

Deal cycles expected to be marginally longer owing to deeper diligence/evaluations by investors/developers on transactions, the report added.

40-60 percent fall in the overall retail supply likely

Prior to COVID-19 crisis, 14 major cities saw an average annual supply of 10 million sq ft of retail space addition. In the post COVID-19 scenario, 40-60 percent fall in the overall retail supply may be likely in next four quarters primarily on account of lower consumer spending, delayed leasing, rental corrections coupled with construction cost and time overruns, the report said.

Currently, institutional lenders such as banks have an exposure of Rs 1 lakh crore to 50 percent of shopping malls and retail centres pan India, wherein 75 percent of the repayment is typically linked to rental income. In the event of no immediate moratoriums and restructuring relief made available to developers, the cascading effect may potentially trigger NPAs for such lenders, the report said.

Two key footfalls drivers-food courts and multiplexes-expected to remain non-operational even as lockdown restrictions are eased in a phased manner

Social distancing induced limitations to severely impair ability of retail establishments to conduct marketing events and promotional campaigns within atriums and open spaces; further dampening sales and footfalls, the report said.

Note: The earlier version of the story erroneously pegged the loss at $1 trillion and has been updated by KPMG to Rs 1 trillion. The error is regretted.

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First Published on May 19, 2020 05:24 pm
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