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Crystal ball gazing into 2021 - what can real estate sector look forward to? Is the worst behind us?

If the economy starts moving towards a positive growth trajectory and the employment scenario improves substantially, residential demand will have sustainable growth from mid-2021. Mid and affordable housing, which is the major proportion of the demand, is likely to revive first

The year 2020 may have seemed to be a ‘lacklustre year’ for most sectors, including real estate due to the aftereffects of the COVID-19 pandemic, but the third and the fourth quarters sprang a surprise.

Driven by low-interest rates, lucrative payment plans, attractive prices, residential sales across the country increased by 34 percent in the September quarter, compared to the June quarter, amid the raging virus, a JLL report had said.

There has also been an increase in the number of enquiries on account of pent-up demand over the last few months and increased affordability of homes.

Prices, too, by and large, have remained stagnant, but in some markets developers did provide moderate price discounts to kick-start sales, thereby facilitating cash flows to tide over the crisis in the short term.

“While the second quarter of 2020 was lacklustre given the lockdowns and overall pressures on the economy. What is remarkable is how the third quarter stacked up, clearly indicating that buyer sentiment was in place and merely held at bay by uncertainty. Having said that, the fourth quarter was definitely better,” said Anuj Puri, Chairman – ANAROCK Property Consultants.


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“The worst definitely seems to be over for the real estate sector. We are seeing renewed interest from both homebuyers and investors alike across various segments. Amidst the volatility of other asset classes – stock markets, mutual funds etc. – and the recent-past financial crisis, real estate as an asset class has proved its resilience,” he adds.

Initially, investors were keenly watching how the market reacted to the pandemic and after due diligence, they are now scouting for good deals across segments in order to avail of the current lowest-best price advantage. As for genuine homebuyers, they are making the most of innumerable deals and discounts doled out by developers, he said.

"With the Covid-19-induced lockdown, people realized the importance of owning a home. Subsequent to emerging as the epicentre of all activities, larger homes having green, open spaces with decks and gardens have witnessed an upsurge. Going forward too, the trend of ready homes will continue to prevail. Reputed developers who can cater to the evolving demands, provide high-quality homes and assure delivery will be more preferred by home seekers,” said Prashant Bindal, Chief Sales Officer, Lodha Group.

Samantak Das, chief economist and head of research & REIS India, JLL, is of the opinion that the economy is going to improve every quarter from now and most likely to witness a positive growth next financial year, albeit on a very low base.

“As a consequence, the real estate sector is going to improve with each segment showing different outcomes,” he told Moneycontrol.

In the residential segment, the environment is conducive for homebuyers. Green shoots of recovery are already visible during the last two quarters of the calendar year 2020. The reasons being that the property valuations are at realistic levels, mortgage rates are at the lowest, some states have started reducing the stamp duty to make property purchase relatively affordable, developers are offering flexible payment schemes and waiver of GST, stamp duty and other benefits.

“If the economy starts moving towards a positive growth trajectory soon and employment scenario improves substantially, residential demand will have sustainable growth from mid-2021. Mid and affordable housing, which is the major proportion of the demand, is likely to revive first,” says Das.

In terms of office segment, net absorption will come back to the levels of 2016-2018 – approximately 33 mn sq ft of annual net absorption. However, office net absorption may not touch the 2019 historic high of more than 46 mn sq ft in the coming 3-4 years. Work-from-home is likely to impact office leasing up to 20% in the medium term.

“We are likely to witness increased demand for office spaces from emerging sectors such as healthcare, FMCG, e-commerce and data centres. A lot of focus will be on the wellness aspects of office buildings,” he adds.

“The residential real estate sector is also expected to consolidate and stabilize further in 2021. The pandemic has given rise to an innate sense of security amongst people. They want to have a safe haven, a place that they can call their home,” said Gaurav Sawhney, chief operating officer, Piramal Realty.

Some real estate experts are of the opinion that while they expect the market to improve in 2021, it may be difficult to quantify the improvement or forecast any growth numbers at the moment.

“On the commercial office front, we expect increased leasing activity as compared to 2020, provided there is no second or third wave of the pandemic and no further damage to the economy. As far as the residential market is concerned, we are already seeing demand gradually coming back, especially in the fourth quarter of 2020. We hope to see the momentum continue in the next year as well,” said Anurag Mathur, CEO, Savills India.

“We are seeing economic activities starting to pick up as the unlocking process continues. Commercial real estate absorption is a direct fallout of rise in the economic activity, and hence, it should be picking up soon. Investment sentiment has also improved significantly, particularly in anticipation that the vaccines would be available soon. So our assessment is that while the first half of 2021 could still be in the recovery mode, we can see some demand traction in the second half of the year,” he adds.

Changing preferences during COVID-19 here to stay

The real estate sector underwent a sea change in the last nine months. The pandemic accelerated the pace of digital transformation. Project discovery for buyers started happening online and developers began to offer virtual tours and interactions.

JLL’s Homebuyer Preference Survey released during the pandemic said that 91 percent of respondents wanted to buy a home. Additionally, 67 percent believed that buying a home was a necessity and not a luxury. The COVID-19 pandemic influenced short-term decisions, with job security cited as the biggest concern while buying a home.

The pandemic reset the significance of owning a house against living on rent. Study rooms gained importance as a large section of the population was forced to work from home. With health in focus, wellness amenities, too, ranked high.

Homebuyers wanted to mitigate the risk and were willing to pay a premium for properties from reputed developers, showing an affinity towards ready-to-move-in homes in gated societies and township projects.

Builders were ready to be flexible to allay buyers’ concerns in a fragile business environment, by offering flexible payment options with minimum upfront payment such as the 10:90 scheme.

Some state governments such as Maharashtra and Karnataka reduced the stamp duty rates to boost demand. Almost 60 percent of the properties on offer were in the sub-Rs 50 lakh and Rs 50-75 lakh categories.

Almost 50 percent of the homebuyers indicated a preference for a 2-BHK apartment with the size ranging from 800 to 1,000 sq ft or a 3BHK with a study. Homebuyers preferred a bigger home with a study, even if it meant moving to the suburbs, and the trend is here to stay.

Before the coronavirus outbreak, consolidation of office space was seen as efficient and cost-effective but work-from-home has led to occupiers looking at setting up multiple office spaces in micro-markets that cater to their existing employee demographics. This is expected to continue in 2021.

But will the real estate market witness a complete turnaround in 2021 after the vaccine is introduced?

India may approve a coronavirus vaccine over the next few weeks and an estimated 300 million people could be inoculated in the first round, the government has said. The possible rollout of the vaccines has raised hopes but it remains to be seen if it will improve the confidence of homebuyers and office occupiers, leading to a turnaround in the real estate sector.

Some real estate experts warn against counting on an immediate revival in the market and say that it may be another 12-18 months before the sector begins to see a turnaround. It will be a gradual shift over the next 12 to 18 months. It’s not as if the entire country will be inoculated in the next few months, they say.

Will prices correct further?

Experts say that there may not be any immediate impact on property prices after the vaccine is introduced as the level of unsold inventory is way too high.

“The total unsold inventory in the top 60 cities stands at almost 13 lakh units and in the top eight cities, it is 9.5 lakh units,” said Pankaj Kapoor, founder-managing director, Liases Foras. The overhang in unsold inventory was close to 50 to 60 months. During the pandemic, there had been a reduction of merely 4 to 5 percent. Therefore, builders were unlikely to increase prices after the introduction of the vaccine, he said.

“Even though the sales are more than new launches, offloading this inventory and reducing it to a sustainable level may take another two years. Therefore, a price increase is out of the question,” Kapoor said.

The commercial real estate segment probably has been hit the hardest with the focus on work-from-home, but the vaccine may go a long way in arresting further vacancies, he said.

Demand to upgrade homes would remain as more people look for bigger homes, he said. As much as 25 to 35 percent sales would be in this segment but for the demand momentum to continue, developers and governments would have to continue with incentives and offers, Kapoor added.

It should be noted that during the pandemic, most developers absorbed indirect taxes such as GST besides stamp duty. They were keen on holding on to the prices to ensure that demand was sustained.

“Quoted prices have not increased but the ‘effective price’ has come down due to the flexible payment plans, offers by developers, waivers in GST and stamp duty etc,” Das said, adding it would likely continue after the vaccine as well.

Ankur Srivasttava of GenReal Advisers is of the opinion that prices by pedigree developers that have received occupancy certificates could inch up going forward. Projects likely to have a short gestation period or houses on independent floors could command a better price once investors tiptoe back into the market after the vaccine is introduced.

Rental market may improve going forward

Once offices begin to reopen, people may return from their hometowns and look for rental accommodation again. The rental market will pick up first followed by the primary residential market. However, immediate change is not expected.

“Rentals have witnessed a dip of almost 20-30 during the pandemic and this may return to normal, almost pre-COVID levels if not more once the vaccine is on the ground,” said Ritesh Mehta, Senior Director & Head - West India, Residential Services, JLL India.

Will mortgage rates continue to remain low?

Mortgage interest rates hit a 12th all-time low heading into November. The Reserve Bank of India has reduced the key policy rate by 115 bps during the lockdown to focus on growth, This has brought down interest rates significantly, giving a boost to housing demand.

Recently, Keki Mistry, Vice Chairman and CEO, HDFC Ltd, said home loan rates were the lowest in the last four decades and that the trend was likely to continue for another six to 12 months.

“For the next six to 12 months, the benign interest rates environment will continue. The growth in the economy and real estate has been sharp. The factors like the RBI infusing much-needed liquidity into the sector, various concessions given by the government, and the developers like the stamp duty relaxations have extended the best buying opportunity for the homebuyers. The trend will continue with the lowest interest rates regime,” he said.

Challenges ahead

There will continue to be underlying challenges in the near future.

“There is still a degree of uncertainty regarding subsequent waves of the pandemic, as seen in the rest of the world, barring India, Argentina and Poland. As a result, businesses and investors remain cautious on making big financial commitments,” said Anurag Mathur, CEO, Savills India.

Secondly, we have seen significant damage to various sectors, like hotels and retail, which will take a long time to recover, he said.

“The most important challenge is a complete or partial loss of income at the household levels. With the depletion in income and a compulsion to live off reserves, the ability to make large investments such as buying homes erodes for a substantial length of time. Under such circumstances people’s ability to take risk is reduced significantly which eventually means recovery would be slow and probably stretched over 3-4 quarters,” he adds.

More challenges remain

Towards the end of the financial year in March 2021, RBI moratorium interest payments are expected to come up. “We do expect the real estate borrower/developer community to face additional credit-related stress due to outstanding moratorium-related interest payments and this might lead to a few developers shutting shop and perhaps even declaring insolvency from the third quarter 2021 onwards. Having said that, we expect the demand-supply equation for residential projects that are on track to pick up significantly,” said Anckur Srivasttava of GenReal Advisers.

By the third quarter of next year, whatever pain had to manifest would have come through, he adds.

In 2021, except for the large and established developers, others will continue to face liquidity issues as access to funding remains restricted. Also, construction challenges in terms of availability of raw materials and labour will remain as all industries are not back to operating at full capacity and labour has not returned completely to the major cities, explains Siddhart Goel, Senior Director, Research at Colliers International India.

The Central and state governments have their work cut out as they try to enthuse the real estate markets through various initiatives.

“However, dependence on tried and tested methods is not prudent in the current unusual circumstances and they need to come up with more out-of-the-box solutions than just reducing stamp duty or introducing ‘work from anywhere’ policies. Further, these policies should target a 2-3 year horizon at the very least to not only bring back the Indian real estate industry to acceptable levels but to set it on a path of sustained growth,” he adds.
Vandana Ramnani

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