Covid Waves: Will They Drown Real Estate Recovery

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REAL ESTATE HAD HARDLY STARTED SEEING THE GREEN SHOOTS OF RECOVERY, THAT THE SECOND WAVE OF COVID PANDEMIC DISRUPTED THE SECTOR’S REVIVAL PLANS. THE THIRD WAVE IS INEVITABLE AS PER HEALTH EXPERTS, AND IT IS TO BE SEEN HOW THE REALTY SECTOR WILL RESPOND. By: Sapna Srivastava The slowdown caused by the COVID-19 pandemic last year severely impacted the realty sector with housing sales in top eight cities of the country dropping by 54 per cent year-on-year to a 10- year low. The office segment witnessed a historic decline in terms of both transactions and new completions. However, by the end of the year 2020, there was a sharp rise in housing sales on account of easing of lockdowns and covid cases coming in control. In fact, 2020 was the year when home ownership became a center of focus, with fence sitters and renters taking the plunge and buying homes and many others upgrading to bigger residential properties. The office and retail space take up remains cautious till now, but the investors’ confidence in Indian commercial realty has continued. India’s second Covid wave has been more devastating than the first, bringing to halt economic activity across India once again. The real estate sector, which witnessed a gradual recovery, is again witnessing a slowdown as sales and construction in the sector have come to a near standstill. THE REVIVAL IN DEMAND, WITNESSED FROM OCTOBER LAST YEAR, RECEIVED A MAJOR SETBACK WITH AN OUTBREAK OF THE SECOND WAVE IN MARCH OF THIS YEAR. THE RAPID RISE IN CASES, LOCALIZED LOCKDOWNS AND PEOPLE MOVEMENT RESTRICTIONS HAVE SEVERELY IMPACTED REAL ESTATE SALES. SECTOR SEEKS SUPPORT CREDAI and NAREDCO, the real estate sector’s apex governing bodies have demanded that the RBI should consider allowing loan restructuring, interest moratorium, and additional liquidity support for the real estate sector. The two associations have urged the Central Bank to announce measures to support the realty sector in dealing with the second wave of the COVID-19 pandemic. CREDAI National President Harsh Vardhan Patodia said that the RBI should make accounts that are classified as SMA 1 and SMA 2 eligible for restructuring and interest moratorium. He asked for additional liquidity to be provided for the development of real estate projects. “The aftereffect of the second wave will last for a much longer period because of the exponentially large number of infections and deaths and the true impact is yet to be assessed. Hence, proactive measures, much larger than those announced during the first wave of the pandemic last year, are the need of the hour,' he said. According to NAREDCO National President Dr. Niranjan Hiranandani, the second Covid wave had been detrimental to the recovery of the sector which geared up in H2 FY 20-21 in lieu of fiscal stimulus and booster dose to bolster the demand. Expressing the demands of the sector, he said, “Industry players suggest extending the RERA completion timelines on the back of inadequate skilled labour availability, dip in productivity as labour has to be staggered following social distancing norms and surging prices of essential raw material prices causing some delays. Furthermore, the extension of PMAY schemes to benefit affordable homebuyers and bringing Rental Housing Act into force will build traction in that domain as well. The Industry urges the government to expedite environmental and other essential building approvals through digitization and single window. The fast track of approvals can cut down project delays by nearly 18 months in Mumbai itself and help the industry to meet the deadlines targeted.” Property developers and consultants are of the view that for the housing sector to do well it is imperative for the RBI to maintain the lower home loan interest regime in the near future as well. This will benefit home buyers and thus the real estate sector. Lower rates were one of the major driving factors for increased housing sales in the last year. NAREDCO Uttar Pradesh chapter has sought suspension of the insolvency law provision by a year from the government on account of the ‘acute liquidity crunch’ being faced by the real estate sector following the second wave of COVID-19. As per the developers, the construction may suffer for the next 6-8 months at least, and even after that, it will take time to restore the material supply chain, re-mobilization of manpower and machines. CREDAI Maharashtra has appealed to extend the concession on stamp duty levied on the construction sector for the period of 2021-22. The Association has also urged for an extension from the State government for registration of documents executed in December 2020 and not to charge the fine as people are already facing economic challenges due to the pandemic. Mumbai developer Boman Irani, Chairman and Managing Director, Rustomjee Group explained, “There is a slowdown in sales not because the buying appetite of buyers is expected to get impacted but “because people may not be able to move and register their property documents.” INDUSTRY PREPAREDNESS FOR SECOND WAVE This time around, the sector players are more confident of handling the ground situation, firstly because of the learnings from the last year and secondly the government across states have kept strict lockdown restrictions localized, thereby limiting disruptions to supply chains and construction as well as people movement. The sector is ready with the learnings from the last year to handle the situation. Manoj Gaur, CMD, Gaurs Group and Vice President - North, CREDAI National said. “After the second wave, the current situation is likely to drive up real estate demand even further. The stability and utility of real estate assets are clear to people, particularly after the experience in 2020 with various other investment tools, and NCR will clock in good sales numbers in the coming months.” “As we have seen during the current Covid pandemic, housing prices per se have not fallen because housing as an asset has gained more significance in the pandemic. In the short run, buyers may not step out due to rising cases, but this has nothing to do with inherent demand. Site visits and purchases will increase as soon as the situation improves, restrictions are lifted and the vaccination drive gains the required momentum even among the 18+ population, added Pune developer Anil Pharande, Chairman - Pharande Spaces. THE DISRUPTION OF CONSTRUCTION HAS BROUGHT THE DEVELOPERS INTO A SITUATION OF SERIOUS LIQUIDITY CRISIS AS THE COLLECTIONS HAVE BEEN COMPLETELY COLLAPSED AND THE BANKS AND FINANCIAL INSTITUTIONS NOT RELEASING FUNDS AGAINST FLATS SOLD UNDER THEIR HOME FINANCING ARRANGEMENT. IN ADDITION, NO FRESH BOOKING IS TAKING PLACE DUE TO THE BUYERS FINANCIAL UNCERTAINTIES IN THE WAKE OF THE ONGOING PANDEMIC. THE MIGRATION OF LABORERS AND INCREASED CONSTRUCTION COSTS ARE ADDING TO THE STRESS. Real estate companies are being impacted in different ways, largely dependent on region and asset class. Expressing his views on the impact on commercial real estate, New Delhi based Aman Trehan, Executive Director, Trehan IRIS stated, “After being hit by Covid-19 pandemic in the financial year 2020, the Indian commercial real estate market was hopeful of the coming year, 2021, to make up for the previous year’s loss to some extent. But with the surge of the second wave of Covid-19, the market conditions are again on a cautious mode due to the unprecedented times. The office space vacancy levels have grown from 12.8% in March 2020 to 14.9% in March 2021, which clearly shows the adverse impact of the pandemic on the real estate sector. However, the duration of the wave & time taken for complete vaccination will determine the final impact of the same." As per industry reports, while office transactions are currently in suspended mode, due to various corporates adopting work from home and work from anywhere models, what is encouraging is the fact that the IT/ITES sector is witnessing robust hiring. Sharing a perspective on future of Co-working segment, Nirupa Shankar, Executive Director, Brigade Group said, “FY 20 saw 15% of the overall office absorption space in flexible / managed offices and market share can go as high as 20% over the next couple of years. This is mostly because of the impact of the Covid- 19 pandemic which has created a larger demand for managed and flexible office spaces that offer shorter lease periods and more flexible terms. Once ‘Work From-Office’ resumes we expect demand to be strong.” THE REALTY SECTOR SEEMS TO BE BETTER PREPARED TO ADAPT TO LOCKDOWNS AND IS FOCUSING ON VIRTUAL TOURS AND DIGITAL MARKETING ACTIVITIES. AT MANY SITES, CONSTRUCTION IS UNDERWAY WITH LOCALLY HOUSED CONSTRUCTION WORKERS. IMPACT ON PROPERTY PRICES Given the present scenario of dropping real estate sales across segments which may see a continued dip during the predicted third Covid wave in July, speculations are rife of property prices going down in the coming months. On the other end, the factors majorly affecting the real estate prices i.e. the raw material and labour has seen sharp cost increase. Therefore, the realty firms are unanimous that there is no probability of a decrease in prices. Kushagr Ansal, Director, Ansal Housing and President, CREDAI – Haryana explains, “The cost of construction has increased by 5-6 per cent, owing to procurement difficulties, supply chain disruptions, rising raw material costs, and increased costs for health and safety as a result of the global crisis. Prices in real estate are at their lowest level and are likely to go up in future. In 2020, we witnessed a marginal increase in prices in few markets, including Delhi NCR.” As per Knight Frank report, property prices across the top eight cities have more or less remained stable on a quarterly basis in Q1 2021, except Chennai and Hyderabad, that have recorded an appreciation of eight percent and five percent, QoQ. In terms of land prices, there has been a decline of almost 15 per cent as per experts. The situation is pronounced in Mumbai, but is also evident in other major cities such as Delhi- NCR and Bengaluru, among others. The reasons attributed to this change are firstly the pandemic, the second wave has intensified the distress among landowners which has created a favorable environment for large developers to buy land. Secondly, as there are only a handful of developers that have strong financials and are in a position to buy, means t's now the buyer's market, not the seller's market." Definitely, the land prices have seen some kind of a correction in the last 12 months. This is not only linked to Covid stress, but it's linked to the overall stress in the real estate and the non-banking sector,” said Piyush Gupta, Managing Director, Capital Markets and Investment Services for India at Colliers. Having said that, almost everyone in the sector echoes the sentiment that there are chances of an increase in property prices for the end users due to developer’s increasing cost burden. To ease affordability, many developers are offering deals to retain the interest of the buyers. Sharing his views on the efficacy of discounts and incentives in the current situation, Nayan Raheja, Executive Director, Raheja Developers, said, “Offers and deals are made in response to the high consumer sentiment and to make consumers go ahead with their decision to invest in a real estate asset. Even though there is still a long way to go, the challenges that real estate faced in 2020 will act as a catalyst for the sector's long-term expansion” COVID-19 KICK STARTS NEW TRENDS Though, the pent up demand remains the underlying growth driver for real estate, the second wave of the pandemic is impacting housing sales levels once again. The forecast of imminent third has further subdued the consumer confidence. However, the real estate professionals remain confident of the likelihood of a quick recovery once the initial impact tapers off and are citing some new trends kick-started by the Covid-19 impact. Surge in First Time Home Buyers - Bottomed-out prices, low interest rates and all-time best affordability drew more first-time homebuyers in India’s largest real estate markets i.e. Mumbai and Delhi-NCR. Of the total housing sales in National capital Region (nearly 21,750 units) and Mumbai Metropolitan Region (approx. 47,140 units) between July 2020 and March 2021, 85% of buyers in NCR purchased their very first homes. Anuj Puri, Chairman – ANAROCK Group observed that post-Covid, in the new hybrid and WFH environment and with various infra upgrades, the peripheral areas in MMR have become attractive. "NCR – where average property sizes start from a much higher base, saw more first-time homebuyers to leave the fence and enter the housing market.” Jump in Larger sized home Sales – Sales of 3 BHK (and above) units rose by 19% across top 7 cities in India in the first quarter of 2021 to 30,169 units versus 25,307 units in Q1 2020. “This trend of looking to buy larger homes will continue in India as complete vaccination of the eligible Indian population is still some time away. There is also expectation of the third COVID wave, which effectively means that WFH is here to stay," said Samir Jasuja, Founder and Managing Director, PropEquity. Preference for Integrated Developments - Post the first wave of the pandemic, developers have been working on floor plans and designs to ensure the efficient utilization of space. Ensuring that homes are multi-functional and have dedicated workspaces. Shankar Sastri, Joint MD, Sterling Developers Pvt. Ltd elaborated, “While it is easy to say that buyers want larger spaces, in reality, affordability constraints make it necessary to have efficiency in design. In addition, developing communities with a plethora of amenities including open green spaces, activity spaces, work pods and Wi-Fi enabled zones, has now become extremely important. Given our learnings from this pandemic, going forward it would be fruitful if the planning authorities insist upon a certain amount of commercial space for daily essentials and a medical clinic for residential projects that are larger than 100 units as it would be beneficial for the residents." IN-BETWEEN THE SECOND AND THE PROJECTED THIRD WAVE SLOWDOWN IS IMMINENT BUT, THE LESSONS HAVE BEEN LEARNT AND EXPECTATIONS ARE IN BALANCE. DEVELOPERS ARE FOLLOWING AGGRESSIVE PRICING STRATEGY, DESIGNING CONSUMER CENTRIC PRODUCTS AND RATIONALIZING THEIR INTERNAL PROCESSERS FOR COST EFFICIENCIES. Lackluster Second Homes Market Brightens-Up – Second homes are no longer being considered for rental income or appreciation. The focus is on leveraging the lower property prices in out if city motorable locations to get bigger homes in greener, safer surroundings. HNIs on the Road to Farmhouse - Amid pandemic that has shaken up the financial and stock markets, real estate has become an important diversifier in HNI investment portfolios. The demand more than doubled in the last 12-18 months with prices of farmhouse properties gradually inching upwards, appreciating to the highest in Delhi NCR by 20-25% on an annual basis. “About 20% of our transactions in Delhi NCR since March 2020 are farm houses. This number is likely to grow further as the demand pipeline is very healthy. This 20% may become 25-30% in the next 6-8 months as people are opting for larger standalone spaces with more play area, office area, etc.,” India Sotheby’s International Realty (SIR) CEO Amit Goyal stated. Increase in Compact offices Demand – As a result of the Covid-19 second wave, most companies are working on hybrid model and/or distributed workspaces. This means organizations that preferred from cramped spaces in city centers are searching for compact offices in suburban locations. As per Yukti Nagpal, Director, Gulshan, compact commercial office real estate is expected to expand by leaps and bounds. “The rentals for these office spaces are in the range of Rs 40-75 per sqft depending on the size & location. The individuals are moving their operations from their homes or unlicensed buildings to swank office environments built to meet the growing demand for high-quality work environments,” she said. INDIAN ECONOMIC RECOVERY Various surveys indicate that second wave has had a devastating impact on India’s economy, especially small businesses, jobs, household incomes and consumer demand. Even rural areas that were less impacted during the first wave have been deeply affected this time. The gains made in March quarter (Q4FY21) in terms of improved GDP growth have been eroded by the second wave of the pandemic. The absence of a major relief package for distressed sectors this time, could also make matters worse. India's Chief Economic Advisor (CEA) KV Subramanian concurs that the second wave of coronavirus has affected the momentum of economic recovery. But, he also expects a recovery in the economy from July onwards and with vaccination program in full swing CEA is hopeful that it will significantly 'lower down' the impact of the third wave. The real estate sector that is witnessing sluggish sales expects this to be a temporary slowdown as the pandemic has emphasized that there is more demand for homes than ever before.