Indian realty stares at a huge loss

The real estate sector may have to face around one lakh crore loss by the end of the fiscal

By Author  |  Business Bureau  |  Published: 22nd May 2020  8:08 pmUpdated: 22nd May 2020  8:11 pm
Indian realty
With staggered revival, the long-term outlook for real estate sector in the coming 18-24 months may turn positive.

Hyderabad: Real estate has taken a hit due to Covid-19 breakdown and will remain impacted in the coming months. According to a latest KPMG report, the short-term impact in the coming 6-12 months is likely to be a dampener for sector’s recovery, forcing players in the sector to contract operations, revisit planned developments, expansions, and investments across the real estate sector. The consequent loss to the Indian realty sector is projected at Rs 1 lakh crore by the end of the fiscal.

Counter strategies to mitigate the impact will mostly focus on cost optimisation, liquidity improvement, space design/layout efficiency maximisation, re-negotiations of contracts, and calibration of business operating models across the board. And as the situation moves closer to normalisation with lockdown easements across India and globally in the medium-term, recovery process will see rapid traction, bringing new opportunities within specific real estate segments.

With staggered revival, the long-term outlook for real estate sector in the coming 18-24 months may turn positive. Albeit, social distancing norms and workplace health safety regulations affecting contraction, the real estate industry’s structural transformations will bring forth latent opportunities within untapped real estate segments such as data centres, integrated supply chains, warehousing, self-sustaining industrial parks, design efficiency processes social distancing and preventive hygiene conscious commercial and hospitality spaces.

According to Chintan Patel, partner and leader, Building, Construction and Real Estate, KPMG in India, “With this recent pandemic outbreak, the real estate sector is likely to be handicapped in the short-term, impacting over 250 related industries and economic sectors. Ongoing financial woes as well as an unprecedented global crisis of the pandemic have unsettled the investment climate and almost no industry is insulated from its impact.”

Impact on asset classes

Residential

Residential sector comprising housing, co-living and student housing will be impacted. Pre-Covid-19 challenges related to subdued demand and liquidity pressures to continue creating slowdown in sales in the short to medium-term. Further, credit crunch impact will create residential sales contraction bringing down sales from 4 lakh units in 2019-20 to 2.8 lakh-3 lakh units in 2020-21 across in top seven cities.

Commercial

In the commercial sector comprising office and coworking, IT and Business Process Management (BPM) sectors will continue demand levels. Despite the lockdown scenario and subsequent easing of restrictions, IT-BPM sector is anticipated to continue driving demand for office space.

Flexible workspaces will re-evaluate models. Despite steady leasing in flexible workspaces across major Indian cities the segment will face major headwinds over the next 9-12 months period.

Facilities management

Facilities management (FM) to emerge as critical enabler to supporting business continuity during the current pandemic ensuring normalcy in office operations and technology support (remote working) for transitioning back to “business as usual”. Facilities management companies may look to diversify their client beyond traditional go to sectors such as office and retail to hedge risks.

Post-pandemic flattening, sectors such as pharma, healthcare will witness stronger cashflows while industrial segments such as manufacturing and warehousing may also see positive growth.

Retail real estate

Although India’s consumption expenditure stood at $1.92 trillion in 2018 growing at a CAGR of seven per cent for the last nine years. Post lockdown, consumer discretionary spending is likely to remain subdued.

About 50-60 per cent contraction in mall footfalls is expected from pre-Covid-19 levels coupled with a significant downtick in overall trading density.

Warehousing

India’s current warehousing sector market had robust absorption volumes of about 37 million sq ft in 2019. However, new leasing activity in 2020 is expected to witness a sharp decline (up to 40 to 50 per cent) compared to 2019.

In the next 2-4 years, the warehousing sector will witness restructured supply chains, preference for local distribution centres and potential shift of global manufacturers from China to other ASEAN countries and India. Ease of doing business and policy framework stability are going to be key to make India a manufacturing hub.

Handholding needed

KMPG recommends that the Government should support the real estate sector by providing financial support in the form of additional funding, loosening lending norms and extending repayment schedules. Regulatory support can be provided in the form of reducing the number of approvals, reducing the timelines for approvals, reducing fees and premiums, etc.

Mitigation measures

  • Govt should fast track land allotment and approval processes, permissions and clearances, and labour reforms.
  • 4Extend moratorium period on term loans and working capital facilities, extend RERA timelines and NBFC loans beyond one year.
  • Create legislations to reduce burden on commercial tenants while safeguarding owners’ interests.
  • Provide increased tax benefits and discounts on housing loan interest rates, and rebate in property tax and utility bills. 4Provide additional funding, loosen lending norms and extend repayment schedules to aid the developers.

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