With the real estate sector still reeling under the impact of the liquidity squeeze, the novel coronavirus, or COVID-19, pandemic came as a double whammy. In FY21, overall sales volume from completed and under-construction inventory are expected to reduce by 40-60 percent on account of COVID-19, an analysis by ICRA reveals.
Homebuyers are expected to continue preference for completed inventory, thus favouring the developers having higher proportion of such projects, it said.
The office leasing segment has witnessed lower impact due to the COVID-19 pandemic. While leasing activity is expected to pick up once normal business activities resume, ability to reach pre-COVID levels may be constrained by any sustained economic downturn as well as adoption of work-from-home on a permanent basis by corporates.
As for the retail segment, ICRA expects cash flows of malls in FY21 to get significantly impacted due to waivers to the tune of 45-60 percent.Housing sales witness drop in sales volume
Housing sales witnessed a 79 percent year-on-year decline in Q1 FY21, it said.
Committed receivables from already booked sales have also been impacted, given that some mile-stone based payments have been deferred due to stoppage of construction activity earlier.
Projects catering to the self-funded segment have witnessed a more significant disruption in collections as compared to the home loan funded segment, as banks continue to make payments to developers. Although in some cases, pay cuts/job losses have led to re-evaluation of buyer credit profile by housing finance companies (HFCs), thus impacting incremental disbursements.
In FY21, ICRA expects collections from customers to decline by around 35-40 percent.
New launches, which were already on a declining trend given the increased focus on deliveries, are likely to get further deferred.
ICRA expects the spend on ongoing projects to reduce by around 30 percent in FY21 on account of the pandemic.
Overall project cash flows are expected to be impacted by slower collections, leading to reduced inflows.Fresh leasing of commercial space reduces significantly
The office leasing segment has not been majorly impacted by COVID-19 pandemic so far. Notwithstanding the widespread adoption of work-from-home by corporates and low proportion of employees working out of the business and IT parks, there has been no material impact on rental collections and occupancy till date, ICRA analysis shows.
Data from developers with significant portfolio of office leasing assets indicate that collection efficiency for billings in Q1 FY21 was more than 95 percent. Certain category of tenants within the segment are highly impacted – such as food and beverage outlets, co-working spaces, small and medium enterprises – and there could be a possibility of rent waivers or deferments offered to such tenants, it said.
However, as the tenant mix for Grade A office parks is dominated by strong counterparties, including large sized IT/ITES companies and captive support service units of multi-national corporates, the revenue impact for FY21 is not expected to be material.
Over the last six months, fresh leasing transactions have reduced significantly due to operational challenges posed by COVID-19 as well as cautious approach adopted by corporates towards office expansion/consolidation plans.
While leasing activity is expected to pick up once normal business activities resume, ability to reach pre-COVID levels may be constrained by any sustained economic downturn as well as adoption of work-from-home on a permanent basis by corporates.
On the other hand, India’s cost competitiveness in IT, knowledge and business support services segment underpins hopes for healthy recovery in demand for incremental office space. Moreover, there could be considerable reduction in the supply pipeline (earlier estimated to be around 120 million square feet over 2020 and 2021) due to moderation in demand over the medium term and constraints on availability of financing, the report said.Net operating income of mall developers to decline by 45-60% in FY21
The retail real estate segment is one of the most impacted segments due to the pandemic as most malls were closed for around three to five months. Even after resumption of operations, local restrictions and weekend lockdowns result in sub-optimal property utilisation.
Mall operators have broadly agreed to waive minimum guarantee rent anywhere between 50 percent and 100 percent during the lockdown period. The quantum depends on the balance sheet strength of the mall operator, the competitive advantage of the property and the bargaining power of the retailer.
Recognising a possible weakness in the performance of the retailers even after resumption, mall operators are offering a staggered reduction in discounts over the next two to three quarters.
ICRA expects the cash flows of malls in FY21 to get significantly impacted due to the waivers to the tune of 45-60 percent. It expects revenue share income to be depressed throughout the year. Rental payments from tenants are likely to lack discipline throughout the year and hence a healthy balance sheet liquidity will be essential.
The rating agency notes that some of the vanilla or standalone retailers may not be able to resume operations even after the rental waivers due to weakening of their financial position, the report added.