A Turning Point For Real Estate Investments

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The term VUCA - volatile, uncertain, complex and ambiguous - befits the current financial scenario across the globe, marred by the covid-19 crisis. Realty+ presents the analysis of the current indian real estate investment ecosystem and the views of finance experts on the way forward for the sector. The covid-19 crisis could not have come at a worse time for India, when it’s financial system and institutions from banks to NBFCs are already under stress. In such a scenario, private equity (Pe) has emerged as a major source of capital for the real estate sector attracting investments of over USD 45 billion from 2011 till date (may 2020). india’s office market grew by leaps and bounds in the last decade. strong Pe investments of over UsD 13.6 billion are a testament to the strong fundamentals of the india office market. riding on the favourable demographics,, rising consumer demand and the low per-capita availability of malls across cities, year 2019 saw record Pe investments in retail with the investment volumes touching a historic high of UsD 922 million. likewise, propelled by reforms such as granting infrastructure status to the logistics industry including warehousing and implementation of gsT, investors committed equity investments of over UsD 6.5 billion since 2017, which is the second highest after office. India’s office market grew by leaps and bounds in the last decade. Strong PE investments of over USD 13.6 billion are a testament to the strong fundamentals of the India office market. Riding on the favourable demographics, rising consumer demand and the low per-capita availability of malls across cities, year 2019 saw record PE investments in retail with the investment volumes touching a historic high of USD 922 million. Likewise, propelled by reforms such as granting infrastructure status to the logistics industry including warehousing and implementation of GST, investors committed equity investments of over USD 6.5 billion since 2017, which is the second highest after office. CHALLENGING YEAR FOR INDIAN REALTY Several rating agencies and banks have cut India’s GDP growth forecast for fy21. With the economy coming under severe stress, the financial institutions are finding it hard to provide the requisite capital required for real estate demands. Rajani Sinha, Chief Economist and National Director, Research, Knight Frank India said, “The lending activities have reduced as financial institutions have become extremely cautious in extending loans. The impact has been severe on the residential sector, which was already facing challenges due to slower economic growth, erosion of end user’s financial confidence and challenges of NPAs. The nationwide lockdown has brought the healthy momentum in office market to a halt too. Businesses have put their expansion plans on hold leading to lower leasing activity especially in Q2 2020. Co-working spaces, that had been observing phenomenal rise till end of 2019, were quick to go into a wait and watch mode, as the vacancy in co-working spaces increased as a direct result of the lockdown.” A primary driver for India’s real estate growth – the residential segment – has experienced considerable setback; while already reeling under the subsisting challenges related to liquid stress, IBC and Non-performing assets situation, delayed projects, inventory overhang and dampened sales velocities in past two to three years. COVID-19 pandemic accentuated the slowdown due to project delays; deferment of big-tickets purchasing; price stagnation, labor issues and delay in funding for investors. Currently, there is a lot of uncertainty regarding CoViD-19 impact on economy. This has led to a sharp drop in valuations and subdued private equity activity in indian real estate. The indian sovereign funds by the government are being deployed to give stimulus and for bailouts. At the same time, availability of distressed assets for sale as a direct consequence of the economic slowdown may provide reiTs a cost-effective strategy to grow. Vishal Srivastava, President – Corporate Finance, ANAROCK Capital was of the view that more than adequate funding is available for projects. “for instance, swAmih, a sovereign fund is available at lower cost and foreign capital funds at a relatively higher cost. but, most of the foreign funds allow the existing lender to take out a portion of the outstanding dues; swAmih fund does not. while, these funds constitute a major relief for cash-starved residential real estate developers. Dealing with these funds also improves the level of corporate governance of developers, which helps in raising new capital in the future.” Compared to developed counterpart markets globally, the penetration of organized commercial real estate is still low, allowing room for further growth. COVID-19 outbreak will reset the commercial space landscape, allowing investors unprecedented opportunities to apply innovative business models. THE TALE OF TWO ASSETS Real estate includes various segments like residential, commercial, retail, hospitality, warehousing etc. housing sales in top 8 cities fell by a massive 54% year-on-year (yoy). New launches also fell by a sharp 46%. The pricing environment has weakened with developers either offering a discount or some form of a financial benefit scheme to prospective homebuyers. On the office market front which was otherwise defined by near unblemished growth – transactions in first half of 2020 fell by a massive 37% yoy, the steepest fall in a decade. new completions that were expected to make an impressive presentation this year fell by 27% yoy. The affordable housing segment continued to be one of the largest contributors to new launches, although its share declined from 41% in h2 2019 to 36% in h1 2020. in absolute terms, the half-yearly decline in this segment was around 61%. no new supply was added in the affordable segment in Q2 2020. RAY OF HOPE 100% FDI in Completed Projects: India is reviewing its foreign direct investment (FDI) policy for the real estate sector to see if 100% overseas investment can be allowed in completed projects. If implemented, this will allow real estate companies to monetise completed projects amid the ongoing liquidity crisis aggravated by the Covid-19 pandemic, thus helping to revive an economically critical sector. REITs the Star Performer: Embassy Office Parks REIT has yielded more returns than those generated by the BSE Realty Index. While the former has given 14 per cent returns during the April 2019 - June 2020 period, the later yielded negative returns of – 20 per cent during the same period. Mindspace REIT will be the second publicly-traded REIT after Embassy and Blackstone raised over Rs 4,700 crore through an IPO in 2019. K Raheja Corp, which owns commercial real estate Mindspace is planning to raise Rs 3,0004,000 crore through REIT Residential: The residential segment was facing severe head winds since last 3 - 4 years. Pre-Pandemic, the sector has faced the biggest challenge of project completion. This was primarily because of poor and mismatch cash flows. Dwindling new apartment sales and downward pressure on property prices lead to poor sales. Developers borrowed money to remain afloat and serviced the earlier loan, but the project did not see any progress. Today due to the CoViD-19 pandemic the problem is accentuated severely by having more unfinished, partially completed, and commercially unviable projects. Banks, HFCs/NBFC are completely risk averse and have stayed away from lending to developers since the IL&FS crises of September 2018. Many leading NBFCs/HFCs which predominantly lent to the sector today are struggling with solvency risk due to asset liabilities mismatch and there is no hope in near future for these companies to come back to business. This situation does not encourage the end user to buy their dream home as they have no confidence in the completion of the project. HNI investors have not seen any price increase in last 5 years and hence stayed away from investing into their favourite asset class. Commercial: Commercial real estate has done extremely well. Almost all income yielding A grade office space is acquired by large global Pe, sovereign investors, or institutional investors. India has seen 60 million sq ft absorption in fy20. The first REIT was very successful and a new avenue to invest into income yielding assets in the listed market became a reality. Another REIT is expected to be listed soon and that will start an era of fixed income plus, liquid investments in real estate. This year due to the pandemic there could be softer rental and absorption or there could be postponement of leasing activities until the economy is stabilised in a year’s time. The hardest hit sector is retail malls and hospitality. Total inventory of branded hotel rooms as of 31 march 2019 was 133,359 with additional 50,170 rooms expected to be added primarily across the 6 metro cities. CoViD-19 recessive impact on tourism and hospitality sector is projected to be the worst. Despite 2019 providing opportunities for hotels to sustain healthy operating performance, CoViD-19 outbreak presents a bleak outlook for the coming two quarters. industry experts feel that decline in occupancy rates between 60-80% across India is expected. The distressed asset funds, structured equity and credit funds are the ones sniffing this golden opportunity where the capital is fully dried for the sector. both retail and hospitality need to recalibrate to the new normal and the relationship between owner and tenant needs to be realigned in common interest of both. This segment may take little longer as compared to others.