The coronavirus pandemic and the subsequent lockdown is a ‘temporary blip’ for a quarter or two and may impact demand and supply across all real estate asset classes. It is also likely to lead to a marginal delay in the deployment of last-mile funding to the stuck housing projects that may have been selected by the fund manager, a real estate expert has said.
“Globally, and India is no exception, real estate is strongly linked to the overall economy. Naturally, real estate- both commercial and residential will be impacted due to the current events. Demand and supply across all asset classes are likely to drop for the next few months as everything is at a standstill. The current situation may also prove to further dampen the sector which is already under immense pressure with the liquidity crisis,” said Anurag Mathur, CEO, Savills India.
But this will be a “temporary blip for most likely one quarter or two at the most. A lot will depend on how quickly India bounces back after the pandemic ceases,” he said.
As for the stressed asset fund, “The government's positive move has given a ray of hope to the already stressed residential projects. This pandemic may at best lead to a marginal delay in the evaluation and deployment to the selected projects,” he told Moneycontrol.
The Rs 25,000-crore alternative investment fund (AIF) was set up to provide last-mile funding for stalled real estate projects by the government last year. SBI Cap has so far cleared Rs 540 crore for two housing projects in Mumbai and Bengaluru.
About housing sales, delays and prices
There’s no doubt that housing sales have been impacted by COVID-19. Construction and transactions have come to a standstill, and sales activities will have to wait until things come back to normal.
“Even thereafter, the housing sales may see a further lag due to these purchases being relatively higher value for most families. We may see a sharp dip in housing sales for a quarter at least but it is too early to assess the impact and put a number to it,” he said.
Will developers role out more sops to boost sales? Developers may not have “any significant levers left with them to pull in terms of rolling out sops for potential buyers. That said, the government can play a role to energize the housing sector and bring back some demand which may be sitting on the fence,” explained Mathur.
As for residential prices, how are housing prices expected to play out at this point in time? “It will be far too speculative. Price elasticity is not a concern under the circumstances since the transaction activity is at a standstill anyway,” he said.
Demand for affordable housing may remain intact.
The base demand for affordable housing at realistic prices still remains. For the last 12-18 months, developers have strived to right-size their offerings to the target market. “We believe this trend will continue after this temporary blip,” he said.
With construction already coming to a grinding halt, project completions too, are likely to be delayed.
“It really depends on how long the current situation lasts and how quickly we can bounce back. With constructions put on hold, there could be a significant delay in project completion. It’s all a matter of how long this phase lasts and how fast we can get back post the pandemic,” he said.
Last week, the RBI called for the great EMI relief for all eventual consumers including homebuyers. All lending institutions have been permitted to allow a 3-month moratorium on term loans. Working capital loan interest payments can also be deferred by three months. These measures are aimed at providing immediate relief and not to boost sales.
“The moratorium has been given to existing customers to tide the immediate hardships that have arisen from the pandemic and not related to boosting demand. These measures are rolled out with an intent to provide some short-term relief to various stakeholders in the industry, particularly homebuyers, during this crisis. Whilst this measure does not impact the future sales of housing units, it is symbolic of what the government can do to help this sector,” says Mathur.
Rental appreciation for commercial properties may witness moderation
Will COVID-19 lead to a reduction in rents and capital rates for commercial buildings as well?
“Rental appreciation in commercial properties for new take up may moderate for some time. In the residential space, India anyway has very low rental yields and may not see any suppression. Generally, it will be too speculative to comment on anything that is specific as we are in the midst of an unprecedented event not just in India but globally,” Mathur said.
Globally, one of the sectors that have been hit the hardest is retail, due to the requirements of social distancing and the lockdown in India is no different.
“We expect that retailers and their landlords will be engaging with each other on how to re-program the rents and arrive at a win-win situation. Both realize that at this difficult time, it is best to approach this as equal partners and find optimal solutions,” he said.
The pandemic may hit new business models such as co-working, warehousing
Every asset class will see some sort of impact because of the uncertainties around the pandemic.
“We have already heard of a sharp drop in footfalls in co-working offices because of travel restrictions and also for reasons of segregation. Such major events tend to hit new business models the hardest and in that sense co-working and co-living operators will be affected. It may challenge some aspects of these models leading to new learnings and course correction,” he said.
But this does not in any way question the need and long term viability of these models.
The warehousing sector is not a part of this set and is in a very strong position.
“Over the last few years, India has been catching up with the developed world in terms of modern warehousing and supply chain methods and this current situation will validate and accelerate that process,” he says.
No major impact on REITs
REITs are a very integral part of all the major world markets, and there is no reason why it would be different in India. Over the last 10-15 years, Grade A properties are being developed and ownership retained.
“These are excellent REITable properties and I am sure there are plans for more REIT listings in the coming years. REITs are a long term play and unless there are some unforeseeable events that follow disrupting the sector even further, we do not see any major impact on REITs,” he adds.
Embassy Office Parks REIT, where Blackstone is a shareholder, listed its units in April 2019, after an IPO where it raised Rs 4,750 crore. Blackstone owns around 15 percent in various special purpose vehicles (SPVs) that are part of the Mindspace REIT.
Companies such as K Raheja Corp, Blackstone Group, Prestige Estates, and Brookfield Asset Management were planning to launch REITs over the next one year. Mindspace Business Park REIT had filed its draft prospectus with the Securities and Exchange Board of India (SEBI) on December 31, 2019. This was set to be India's second REIT issue.
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