Global slowdown, SVB collapse may delay real estate launches; dent commercial sector

Sankey Prasad, chairman of Colliers India

Global headwinds following the collapse of Silicon Valley Bank in the US will dent affordability in the commercial real estate sector, especially in IT hubs such as Bengaluru, experts said.

In the mid-segment residential sector, already grappling with rising home loan interest rates and layoffs, launches will be slower, they said.

“If the slowdown continues, we could see a low gross commercial absorption of as much as 30-33 million square feet. And this can potentially delay new residential launches already in the pipeline,” Sankey Prasad, chairman of Colliers India, told Moneycontrol. “However, the sector has the potential to recover if the slowdown does not last past June.”

Prasad explained that the SVB collapse will mostly impact the US-market-based technology sector and startups.

“This has primarily affected mortgage security, a problem that the US has always had. Several startups in India, especially in Bengaluru, have exposure to the US-based funds,” he said.

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Companies that rely on foreign funds need to look for alternative investment opportunities, he added. Over the next few months, the impact will be visible in the US corporate landscape.

Short-term impact

From an Indian perspective, Prasad said the commercial sector is largely dependent on external demand, with the tech sector the predominant driver for Indian offices.

SVB was the preferred bank for startups and venture capital firms. Regulators shut down SVB, which had $209 billion in assets at the end of 2022, on March 10 after a run on the lender. The Federal Deposit Insurance Corporation, which took over SVB, said depositors would get full access to their money starting March 13.

Prasad said companies, already grappling with a slowdown and rising interest rates, could further delay their real estate plans and thereby stall project launches. However, Prasad said the impact on Indian real estate would be short-lived.

“Less than 5 percent of Indian real estate companies rely on foreign funds. Thus, within 12 months, we can expect the sector to come back… We need to be conservative and cautious about our investments. For residential, the higher segment will be largely unaffected," he added.

For the residential segment, Prasad added that it is too early to predict a shift in costs. However, affordability in the mid-segment bracket will take a major hit if the slowdown persists.

Since the pandemic, working from home has dented the commercial segment in major cities, according to Prasad.

“Though co-working reduces costs, major clients such as IT companies will always prefer their own spaces. Thus, as hybrid working normalises and we see more offices opening up, commercial demand will pick back up,” he said.

Prasad said with interest rates going up since May 2022, homebuyers are already struggling with loans. This is impacting the bottom of the mortgage pyramid and is not a healthy sign, he said.

According to the State Bank of India’s economic research department, for home loans of Rs 30 lakh, about 45 percent were dispersed in January and February, down from 60 percent a year earlier.

“This is impacting the decisions of millennials who are increasingly investing across real estate sectors in India. The new tax regime presented in the Union Budget 2023 may offer some relief. However, the residential sector will be impacted,” Prasad said.

Many A-grade developers are currently holding off launches as they wait and watch.

“Affordability is a challenge in city centres today, with land costs and construction costs soaring. Unless interest rates are corrected, we will continue to see spikes in costs,” he added.

However, Prasad added that compared to previous slowdowns, the real estate sector will not become stagnant.

“Currently, the market fundamentals are very strong. Opportunities in developing countries like India are unlimited and several private equity companies are already looking forward to coming to India in the second half of this year,” he said.