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COVID-19 Second Wave: Real estate projects may get delayed; cash flow issues likely to increase

Real estate may face more pain than last year, when the government and the central bank had stepped in for support, but residential property prices may rise as the stress reduces supply, and demand in small cities may increase because of remote working.


The relentless rise in COVID-19 infections and stringent restrictions in major urban areas has clouded the outlook of real estate, particularly commercial properties that are feeling the heat of the growing work-from-home culture.

Experts say restrictions in major real estate markets like Maharashtra and NCR will delay of projects as many construction workers have returned to their villages, but diminishing supply may support property prices in the next few quarters.

Low interest rates may encourage people to buy homes in low-density, plotted developments in gated communities with shared and well-managed infrastructure, but credit stress among developers is expected to continue and distressed real estate may emerge as a separate category, they said.

Impact on residential real estate

The second wave may hamper the recovery the real estate sector saw in the last six months, an analysis by CARE Ratings has said.

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Demand may recover faster for affordable housing and mid-price homes, helped by the government’s credit-linked subsidy scheme it said. The government has extended the deadline for the benefits on purchase of affordable housing by one more year, to March 31, 2022.

Demand is expected to be better in smaller cities as remote working has encouraged people to buy houses in their hometowns.

Sales had revived by end of 2020 as buyers regained confidence. “This has been on the back of low home loan interest rates, stagnant residential prices, lucrative payment plans and freebies from developers and government incentives such as the reduction of stamp duty in states like Maharashtra and Karnataka (for affordable housing),” said Samantak Das, Chief Economist and Head Research & REIS, JLL.

“However, the rising concerns of the rapid spread of the pandemic has compelled several state government to lay and enforce stringent lockdown like restrictions. While this is essential to break the chain, it is likely to impact real estate business in the next few months,” he said.

In 2021, the housing demand is likely to return to 2019 levels but only if the impact of the second resurgence is not a prolonged one because if it is, jobs may be hit and that is likely to impact the residential segment, he said.

Will developers launch new projects?

New launches will be few and far between as developers will focus on completing existing projects with limited labour.

“Given the current situation, new launches are expected to get delayed as we recalibrate the approach to suit the current times but we are working towards completing existing projects,” said Rohit Poddar, managing director, Poddar Housing and Development Ltd.

He said the revised stamp duty since April 1 has hit demand but the pandemic had made people realize the worth of owning a house.

Mohit Goel, CEO, Omaxe Ltd hopes said if lockdowns continues for a long time, the sector will feel the pain. There would be fewer launches and sales. Delivery may also get impacted.

Dhruv Agarwala, Group CEO, Housing.comMakaan.com & PropTiger.com said construction activity at project sites will take a big hit.

“The pain could be greater than the first wave because the already disrupted supply chain had barely started to recover, and now with states imposing lockdowns and curfews, labour migration is beginning to happen once again. This may lead to project timelines getting deferred by three to six months,” he said.

Will prices correct?

Prices in most residential markets have stagnated in the past few years. Some developers have been offering moderate price discounts and attractive schemes such as no EMIs for a year, no stamp duty and so on to attract homebuyers. “This has led to a reduction in effective prices. This rationalisation combined with reduced home loan rates has further improved affordability in the residential market,” explained Das.

“With new project supply slowing down to a trickle in the next few quarters, the resulting demand-supply mismatch is likely to drive up residential values in the next two to four quarters countrywide,” said Anckur Srivasttava, chairman, GenReal Advisers.

In the top six cities, nearly 18 percent of the unsold stock of over 6.06 lakh units is ready-to-move-in. As per ANAROCK Research, unsold units as end of the first quarter of 2021 in Bengaluru were 58,350 and ready-to-move in were as many as 20%. In NCR, of the 1.68 lakh unsold units, at least 14% were RTM and in MMR, of the 1.97 lakh unsold units, 14% were RTM.

This means NCR, which absorbs 40,000 units a year, has an RTM inventory of 23,000-odd units, or three quarters of supply. This clearly indicates that under the current circumstances, the demand-supply equation will gradually hit an inflexion point and prices may rise, explains Srivasttava.

Residential buyers are likely to continue preferring ready-to-move-in apartments, especially with more room and open spaces.

Credit stress to continue

Experts say liquidity issues are likely to continue with the loan moratorium having been done away with. Pain in the sector is likely to be much more than last year as there will be no monetary support from the government or the Central Bank.

Distressed real estate is likely to emerge as a separate category. “Several platforms may take root between investors wanting to put in money in distressed projects and real estate developers,” says Srivasttava.

Last year, the RBI had announced certain relaxations towards the real estate sector wherein NBFCs could extend commercial real estate loans by one year if projects were delayed for reasons beyond the control of promoters, without treating it as restructuring.

It had also extended the deadline for the Emergency Credit Line Guarantee Scheme,  ECLGS 2.0, until March 31, 2021. Some states took steps to boost sentiment such as Maharashtra’s reduction of stamp duty on property purchases until March 31, 2021.

Impact on commercial real estate

ICRA said the second wave of the pandemic may delay the recovery in new leasing activity. The share of employees continuing to work-from-home may remain elevated in the near term, owing to the health risks. “Without immediate visibility on larger number of employees returning to offices, potential leasing transactions may get further deferred,” it said.

Earlier, declining infections along with vaccination was expected to speed up normal attendance at offices, which would have increased leasing transactions.

CARE Ratings said office rentals are likely to be impacted by the emergence of Blended Work from Home culture.

The second wave will also impact the institutional flow of funds into commercial real estate. This will result in the overall sentiment in commercial office space being relatively muted, Das told Moneycontrol.

Considering the current situation, the commercial net absorption figures is expected to be 25 mn sq ft to 28 mn sq ft in 2021, down from earlier expectations of 30 mn sq ft to 32 mn sq ft in 2021. Therefore, there will be a definitive impact of this resurgence, Das said.

Monetary pain in the commercial segment is expected to increase. “This is already getting reflected in the pricing of all the REITs in the market,” explains Srivasttava.

More companies may adopt a hybrid working model and include co-working spaces to give employees some flexibility.

As corporate occupiers remain uncertain about long-term office leasing plans in 2021 and 2022 and are still re-assessing their office space needs, they are exploring leasing desks in flexible workspaces to avoid long-term capital expenditures, and to get more flexibility on their lease terms, a report by Colliers said.

Occupiers are expected to focus on portfolio optimisation through 2022 and explore ways to shift teams into multiple, smaller managed spaces than their existing large, consolidated offices or use flexible workspaces as a stop-gap arrangement until they relocate to entirely new offices, it said.

“Commercial real estate developers too are expected to incorporate the flexi-space component as part of their product offering. Going forward, they may also work out revenue sharing arrangements with co-working firms and enter into equity driven, profit share or partnership models,” adds Srivasttava.

Impact on retail

CARE Ratings said malls also had a negative outlook because of limited footfalls and growing popularity of e-commerce.

According to an analysis by ICICI Securities, in FY21, most mall developers had offered a 50% waiver for the year and as per agreements with most retailers (barring multiplexes), mall rentals were to revert back to pre-Covid minimum guarantee levels. However, the fresh round of lockdowns may lead to another round of rental negotiations/waivers having to be offered by mall owners in FY22E as well.
Vandana Ramnani
first published: Apr 22, 2021 01:04 pm

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