The fledgling real estate sector suffered a crippling blow from the COVID-19 pandemic in 2020. However, the badly bruised segment showed great resilience to stage significant recovery in the festive quarter to hold promise, though challenges remain on the ground.
All said and done, the worst is behind real estate. The pandemic has given real estate companies an opportunity to innovate, reinvent and revisit their strategies with regard to ensuring continuity in business operations to navigate COVID-19 disruptions. Affordable housing and mid-income housing will ensure turnaround of the real estate in 2021. The consolidation in the sector will see quality and credible players driving the sector to sustainable growth in the long run.
Despite this positive outlook, challenges remain on the ground. Notwithstanding strong uptick in residential realty in festive quarter of October- December, the overall sales for the year have plummeted by 47 percent year-on-year, as per Anarock.
Further, the rising unsold home stock is a challenge. According to Liases Foras, at the end of FY20, it took 15 quarters to clear inventory, which increased to 19 quarters by H1, FY21. But developers hope that the IT relief by way of allowing primary first sale of housing units costing up to Rs 2 crore at a price 20 percent below the stamp duty circle rate, will help them to liquidate inventory.
Having said that, raising capital will continue to be a challenge. weak developers in particular may find it difficult to raise money. Even if they manage, they may have to pay a higher rate of interest.
The year 2020 was looked up to as a year of strong recovery for residential realty. However, the first quarter of FY21 marked by Coronavirus-triggered lockdowns, saw housing demand crash and sales came to a standstill. Even the promising co-living segment fell victim to the Corona onslaught. The residential segment, according to Anarock Property Consultants, witnessed 49 percent decline in home sales in comparison to H1 2019.
The office real estate which saw robust growth in 2019, was expected to do even better in 2020. However, like residential realty, commercial office real estate too could not escape the Corona blow. The lockdown, coupled with strict social distancing and safety norms at workplaces, work from home practice adopted by companies, led to sharp decline in demand for office space.
The magnitude of this disruption is clear from industry statistics. The office real estate supply registered a decline of 27 percent YoY in H1 2020, as per Knight Frank India. The decline in office leasing was even sharper at 37 percent YoY.
The co-working segment which was performing extremely well in pre-COVID period, too suffered a setback. According to Savills India, leasing of office space by co-working players is expected to fall 58 percent YoY to 3.4 msf in 2020 across six major cities of Delhi- NCR, Mumbai, Bengaluru, Hyderabad, Chennai and Pune against 8.1 msf of leasing in in 2019. As a consequence of that, the share of co-working space take up to overall office space take up is set to reduce by 11 percent.
The retail real estate was the most hit as shopping malls suffered shutdown for almost half the year from April onward. Multiplexes, the main revenue driver for shopping malls, even took longer to open. However, footfalls at malls and multiplexes have remained abysmally low. Further, the rent-waivers offered by mall owners to retailers severely impacted their revenues. The high vacancy levels in malls were also an indicator of mall mayhem.
According to Anarock, mall vacancies have risen between 50-530 bps, compared to a year before. Rents also went down by 25 percent. What further added to the woes of retail realty was that PE investments into the segment declined during January- September period on a YoY basis. PE players abandoned retail real estate in favour of office assets. So much so that in the September quarter, retail realty did not get any PE investment.
However, after bottoming out in H1FY21, real estate, especially residential realty staged a strong recovery in the festive quarter of October- December 2020. According to JLL, Q4 home sales across seven key markets saw average increase of 51% over third quarter sales, with Pune witnessing the whopping 147 percent jump in sales. New launches soared 79 percent of pre-COVID level, according to Anarock.
Home affordability drove sales. Barring Mumbai, the home affordability index, according to Knight Frank India, dropped significantly to a safe level of 24-38 percent in top 8 cities. The index below half is considered affordable in terms of purchasing a house. Static prices, attractive deals and discounts by developers, low interest rates, zero GST on ready homes and stamp duty relief in states like Maharashtra and Karnataka paid rich dividends.
Banking on digital marketing, developers came up with attractive schemes like subvention and EMI holiday. Some builders in NCR launched property exchange schemes, offering a new property against the property in a stalled project. The prevailing affordability will continue to drive both pent up demand and new sales.
On the office front, while April- June quarter was washed out by lockdowns, the road to recovery for commercial realty began after some economic activity picked up pace post June. This was clearly reflected in September quarter numbers.
According to JLL India, the September quarter registered a massive uptick of 64 percent in absorption over June quarter. The office real estate is expected to traverse the recovery path in 2021, driven by warehousing which has been witnessing good demand due to spurt in e-commerce. The APAC Capital Market Forecast by Knight Frank India, points to stable run for commercial office real estate
Amid job and income uncertainty and movement restrictions, the year 2021 offers little hope for retail real estate. However, developers of badly mauled malls are pinning their hopes on 2021. They are also banking on revenue sharing deals.
The alternate asset classes of warehousing/logistics and data centres hold great hope in 2021. Demand for warehousing continues to be driven by booming online retail. According to Knight Frank India, about 3.45 msf of warehousing stock was added in tier 1 cities in the third quarter of CY20, registering a growth of 88 percent, compared to previous quarter. Around 3.81 msf of space was absorbed in Q3, CY20, with an increase of 93 percent compared to previous quarter.
Logistics players are set to benefit from higher freight volumes. Disruption in supply chains across industries is proving to be a boon for warehousing, pushing up demand for storage space. Major warehousing hubs are set to see a rise in rentals and foreign PE funds are betting big on warehousing. According to JLL India, investor confidence and capital values are expected to remain intact.
Increasing digital adoption due to Corona pandemic has immensely benefited demand for data centres. Booming e-commerce, growing concept of WFH, online education, video-conferencing, webinars and online medical consultancy are all major contributors to data demand.
According to Anarock, in the first quarter of FY21, following lockdown, 25-35 percent increase in data centre capacity was witnessed. Regulatory condition for MNCs to store and process user data within the country's borders has also been a demand driver.
As per Colliers International, the share of PE investment in data centres is as high as 46 percent. According to Nomura, the Investment Index post-lockdown, had touched a high of 89.2 by November end. Realty players are also out to capitalise on increasing demand of data centres, by tying up with data centre operators to develop these assets.
The author is a senior real estate journalist.( This is a partnered post.)