The real estate sector, particularly the student housing segment, has been impacted due to the current social and economical uncertainty caused by the coronavirus pandemic.
According to an EY report titled 'Impact of COVID19 on the student housing segment in India', student housing has attracted significant investment of $600 million. However, the current situation has resulted in major changes affecting all four stakeholders -- educational institutions, students, asset owners and student housing providers and managers.
Although education is considered recession-proof, operators in both important models -- business-to-business (B2B) educational institution model and the business to consumer (B2C) student as consumer model, have been impacted.
Gaurav Karnik, Partner - Real Estate, EY India, said, "The B2C model, where most students pay monthly, has seen a larger impact. Students who have left are less likely to pay their monthly rentals for the remaining two months. But most operators have two months of the refundable security deposit which could help them avoid revenue shortfall. However, students could use force majeure as a reason to claim refunds."
Student housing managers and operators are trying to reduce variable costs for services such as housekeeping, security and laundry by complete closure or offering partial operations as some students are still stuck due to the lockdown and restrictions on movement. Some claim to have suspended vendor contracts for a few months while others continue to honour minimum vendor payment according to the contract.
"Student housing operators have maintained that there have been no pay cuts until April 2020. But subsequent months may witness a 25-30 percent reduction in wages if the crisis continues," the report states, adding that if the spread of COVID-19 continues for a long time, the real estate prices and rent for such facilities is likely to decline by 20-25 percent over the next few months.
In the event of a delay in the commencement of the academic sessions, operators are likely to lose out on three to four months of revenue. Moreover, if students decide to practice social distancing or operators offer it as a differentiator, they may also see a lower occupancy.
In terms of bed configuration, on average, the number of three or more bed categories to other categories is 45 percent. And assuming a 15-20 percent reduction in capacity, the effective loss in revenue for a 200-bed facility would be approximately Rs 15 lakh per annum - a 40 percent reduction in margin. Part of this loss can be recovered by charging higher fees.
"The pandemic will also stop the per annum increase in housing rents. On average rents increased by 7-10 percent every year in the last three years. Operators will have to take a pause on increase this year considering the situation. On the flip side, operators can also defer employee appraisals," the report added.
From a cost perspective, more cleaning and fumigation will be required, thus increasing the maintenance cost marginally.
In addition to all this, a larger problem could arise if colleges decide to run the early part of the first semester through virtual classrooms. In such an event, the revenue loss could be close to four to five months.
“This crisis has also upended many assumptions about the form, structure and depth of the partnership between property owners, operators and users. Most stakeholders have accepted the need for greater flexibility which will help put the sector on a sounder footing as we go beyond the pandemic," said Sailesh Rao, Partner - Real Estate, EY India.