With the pandemic reshaping the ‘new normal’, the real estate sector in India is staring at a likely loss of nearly $1 trillion by the end of the current financial year, KPMG said in a report titled COVID-19: React, adapt and recover – The new reality: A perspective on the Indian real estate sector’.
The report attempts to unravel the possible opportunities with key real estate segments and suggests workable strategies to capitalise on the emerging potential for industry stakeholders.
The report says that the short-term impact in coming 6-12 months is likely to be a dampener for real estate sector’s recovery, forcing sector entities to contract operations, revisit planned developments, expansions, and investments across the real estate sector.
To mitigate impact in the short term, the real estate sector is likely to focus on cost optimisation, liquidity improvement, space design/layout efficiency maximisation, re-negotiations of contracts, and calibration of business operating models across the board.
In the medium term, as the situation moves closer to normalisation with easing of lockdown across India and globally, recovery process will see rapid traction, bringing new opportunities within specific real estate segments.
The report states that with staggered revival, the long-term outlook for the real estate sector in the coming 18–24 months may likely emerge positive.
However, with physical distancing norms and workplace health safety regulations affecting businesses, the real estate industry is likely to see a structural transformation, which will bring forth opportunities in untapped real estate segments such as data centers, integrated supply chains, warehousing, self-sustaining industrial parks, design efficiency processes and commercial and hospitality spaces that can implement preventive hygiene.
Talking about the sector, Chintan Patel, Partner and Leader – Building, Construction and Real Estate, KPMG in India, said, “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. In addition to capitalising on the intervention proposed by the Government, the industry should resume operations post lockdown by leveraging technology innovations for enabling employee and consumer health safety standards, design flexibility (Work from Home), cost optimisation and consumer engagement (such as AI, VR, BIM, etc.), focused localisation of supply chains, reorganisation of business models, which is likely to revive activity, accelerating Indian real estate’s turnaround over the coming 12–18 months. 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.”
Regarding the potential impact of COVID-19 on various asset classes, the residential sector (housing, co-living /student housing) is likely to see lean sales in the short-medium term with pre-COVID-19 challenges related to subdued demand and liquidity pressures continuing. The credit crunch impact will bring down sales from 4 lakh units in 2019-20 to 2.8 lakh-3 lakh units in 2020-21 across the top 7 cities.
In terms of the commercial sector (office, co-working), despite the lockdown scenario and subsequent easing of restrictions, IT-BPM sector is anticipated to continue driving demand for office space. Despite steady leasing in flexible workspaces across major Indian cities, the segment will face major headwinds over the next 9-12 months.
In the retail real estate, a recovery is expected despite uphill challenges.
India's consumption expenditure stood at $1.92 trillion in 2018 growing at a CAGR of 7% for the last 9 years. However, post lockdown, consumer discretionary spending is likely to remain subdued. Over the medium term, 50-60% contraction in mall footfalls is expected from pre-COVID-19 levels coupled with a significant downtick in overall trading density.
The KPMG report states that the post-COVID-19 outlook for industrial real estate will be a mixed bag; where on one side, industry struggles with supply side disruptions for maintaining operational capacity while on the other side, focus on localisation of supply chains and catering to domestic demand will provide fillip for capacity additions, diversification and expansions.
Warehousing is likely to witness a quicker recovery supported by e-commerce. Over the short term (coming 9-12 months), new leasing activity in 2020 is expected to witness a sharp decline (~40 to 50%) compared to 2019. India’s warehousing sector market had robust absorption volumes of ~37 MSF in 2019. Long term impact (24- 48 months) could see 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 key to make India a manufacturing hub, the report adds.
Recommendations for the government to enable the real estate sector to not only survive but to perform to its fullest potential include: Financial support in the form of providing additional funding, loosening lending norms, extending repayment schedules; regulatory support in the form of reducing the number of approvals, reducing the timelines for approvals, reducing fees and premiums; and fiscal support in the form of tax incentives and reduction in GST rates.