Real estate sector is one of the most globally recognized sectors. It comprises of four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth in the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.
As we have all learned this year, life can be very unpredictable. Normal life has been flipped on its head and has tested everyone. One of the effects on real estate has been the movement out of office space, ostensibly for social distancing purposes, but what does this mean for the future of office buildings … and their tenants. Yes, technology has advanced to enable everyone to be connected, whether they are sitting at their desk in an office or sitting at their kitchen table. Plus, many folks are seeing the benefits and efficiency of zero commute time, a more efficient workforce, lower facility cost, etc.
While right now it seems like a short-term reaction to the pandemic, this is a trend that will, most likely, not die soon. Many major companies have already started to permanently get rid of their office space and move to remote working arrangements. Most Technology Companies in Silicon Valley is in the process of permanently shifting most of employees towards remote working and flexible workplace layouts over the next 12-24-months. So, it seems like office space is getting ready for a shock as existing tenant leases come up for renewal. The prognosis is that office vacancies will grow, and rental rates will be stagnant or decline.
Real estate sector in India is expected to reach US$ 1 trillion by 2030. By 2025, it will contribute 13% to country’s GDP. Emergence of nuclear families, rapid urbanisation and rising household income are likely to remain the key drivers for growth in all spheres of real estate, including residential, commercial, and retail. Rapid urbanisation in the country is pushing the growth of real estate. >70-75% of India’s GDP will be contributed by urban areas by 2020. India's Global Real Estate Transparency Index ranking improved by a notch to 34 in 2019 on the back of regulatory reforms, better market data and green initiatives. Government of India’s Housing for All initiative is expected to bring US$ 1.3 trillion investments in the housing sector by 2025.
We have entered a new investment order. The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate. Experts see transformations across sustainability, inequality, and geopolitics and macro policy. The new investment order is still evolving, and investors will need to adapt.
Traditional business cycle analysis doesn’t apply in the wake of the Covid shock. Experts see it as akin to a natural disaster, which is typically followed by rapid economic restart with little permanent economic damage, and expect it to speed up structural changes. This is very different from the 2008 crisis, which was followed by a “lost decade” of deleveraging and declining trend growth.
As for retail the digital technology will have an effect on the brick and mortar sales which in turn led to the large amount of tenant defaults, bankruptcies and downsizings that were as a result of the government-mandated closure of many retailers. So, what this means is that many retailers that once never thought a certain center or location was in their price range, now have the ability to negotiate from a position of strength with these desperate landlords that are now looking to fill vacated space. The prognosis is that retail vacancies will grow, and rental rates will be stagnant.
While the adverse effects of the pandemic are already being felt across the world, varying opinions are emerging with respect to COVID-19’s impact on the real estate sector, a health emergency that has force launched the biggest ever work-from-home experiment globally, putting a question mark on the relevance of workspaces in a post-Coronavirus world
Many Research agencies are predicting a near-term halt in growth of real estate in India. The lockdown, which virtually brought to a standstill most economic activity in the country, has hurt all sectors, including real estate. The adverse impact of the Coronavirus is visible on housing sales in the last few quarters. With several macro-economic indicators showing a positive trend we may well be on the road to a more sustained recovery in 2021, post monsoon when we enter festival season.
Due to the lockdown announced on account of the COVID-19 outbreak, both, construction and sales activity have come to a complete halt across the entire real estate sector. On several sites, construction workers, too, have gone back to their home towns. Even after the lockdown, activity will only recommence gradually, which will cause project delays of anywhere between 6 to 9 months.
Niranjan Hiranandani, national president, NAREDCO, states that “Salvaging Indian realty, the second-largest employment generator is critical, not only from the GDP growth perspective but also for employment generation, since the sector has a multiplier effect on 250-plus allied industries.”
The demand slowdown in the residential segment has already curtailed housing sales, project launches and price growth in India’s residential realty sector, which has been reeling under the pressure caused by disruptive regulatory changes, such as RERA, GST, Demonetisation and the benami property law.
COVID-19 impact on home buyers in India
With respect to Housing, the current economic forces have had an impact on the incomes, livelihood, and savings of many citizens. As a result of this, and in particular for middle class, it appears that many of these folks will continue to stay in current home (whether rented or ownership) for the foreseeable future. The prognosis is that the demand for housing will remain low due to the effects of Covid-19, and even rental rates will remain flat, until clarity is reached for future employment outlooks. As regards buying a new house or upgrade, many of them are postponing their purchases till economic & employment situation stabilizes and these buyers feel confident of servicing their Mortgage EMIs. The fact that businesses would scale down their workforce would also force many prospective buyers to wait for clarity on their job security, before making a final decision on property purchase.
COVID-19 impact on Builders
Slump-hit builders were pinning their hopes on government support to shed the increasing unsold stock even as an ongoing crisis in the country’s NBFC sector, a key source for housing sector funding, made borrowing extremely difficult, jeopardising their plans to deliver projects within the promised timeline. This happened after IL&FS, DHFL & Yes Bank defaults leading to cascading effect on NBFC lenders.
Developers are sitting on an unsold stock. A near-halt situation on construction activity amid a lockdown in India to contain the virus and delay in supply of manufacturing material and equipment from China will further push delivery timelines of ongoing projects, consequently increasing the overall cost for developers. Through furious efforts, China, the country where the virus originated, has been able to rein-in the pandemic, with workers returning to offices. However, amid tension between the two neighbors, builders in India were forced to postpone orders.
The pandemic menace has hit at a particularly sensitive time. Across realty companies, this is the time when statutory payouts and streamlining of balance sheets happens.
Affordable Housing- "Housing for all by 2022 Mission"
The Government’s ‘Housing for All’ push coupled with multiple sops to buyers and developers brought on an avalanche of Affordable Housing projects.
Experts foresee that substantial movements will be visible in the affordable and mid-income housing segments. These segments, driven by end-users are expected to largely remain resistant to any price corrections. It is mainly due to the realization that owning a home is important. This class also faced difficulties in coping with rents during the lockdown and having to stay put in un-gated areas with no security. This segment always had the demand and post COVID-19 it will increase manifold as fence-sitters will buy now.
The current definition of affordable housing include a house with carpet area up to 90 sq. m. (968 Sq. Ft.) in non-metropolitan cities and 60 sq. m (645 Sq. Ft.) in metropolitan cities and having a value of up to Rs 45 Lakh or both.
Government Benefits
The government provides a subsidy to economically weaker sections of the society under the Credit Linked Subsidy Scheme (CLSS) component of PMAY scheme. All the families falling under:
· Economically Weaker Section (EWS) with an annual income of up to Rs 3 lakh can apply for CLSS scheme.
· Low Income Group (LIG) consists of households with an annual income is between Rs 3 lakh and Rs 6 lakh.
· For Middle Income Group (MIG), the scheme has been divided into two categories. MIG-1 includes households earning less than Rs 12 lakh per annum. On the other end, MIG-2 category consists of households making less than Rs 18 lakh as annual income.
The maximum subsidy availed by LIG and EWS, MIG 1 and MIG 2 are Rs. 2.67 lakh, Rs. 2.35 lakh and Rs. 2.30 lakh respectively. The budget announcement was over and above these subsidies.
For Developers- To boost the supply of affordable housing projects, the government provides tax holiday to developers on profits earned from affordable projects.
Income Tax benefits for Home Buyers
· 80C-principal repayment up to Rs.1,50,000/-
· Section 80EE-Additional home loan interest tax benefit for first-time home buyers, Rs.50,000/-
· 80EEA-up to Rs. 1.5 Lakh on the home loan interests paid
· These home loan tax benefits are available over and above the existing exemption of Rs. 2 Lakh under Section 24(b).
Currently, the housing shortage in urban areas is estimated at about 10 million units. And in fact, an additional 25 million affordable housing units are needed by 2030 to address the country’s growing urban population.
Development of infrastructure on a scale as huge as this is expected to create new housing hubs for the salaried middle-class as a result of high level job creation. It augurs well for the affordable housing sector.
The Rise in Demand for Integrated Townships
With property prices sky-rocketing in the cities and stagnant economic development opportunities, more and more Indians are looking at Tier-II emerging cities. These cities not only present an affordable alternative to the metros but also have the infrastructure and other factors working in their favour. Due to the availability of huge land parcels at Tier-II emerging cities at affordable rates, developers can construct high-quality residential homes and townships at competitive prices, compared to cities.
Huge Growth potential in Tier II & III Cities
A study has identified the cities of Ahmedabad, Bhubaneswar, Chandigarh, Coimbatore, Jaipur, Kochi, Indore, Nagpur, Vadodara and Visakhapatnam as the top 10 emerging cities of India. India is home to some of the top 10 fastest-growing cities in the world, according to a research report from Oxford Economics. Noida, Ghaziabad, Gurgaon, Goa, Guwahati, Lucknow, Ludhiana, Mysore, Pune, Jalandhar, Hyderabad, Surat, Rajkot, Kochi, Agra, Vijaywada, Tiruppur, Trichy & Thiruvananthapuram are also growing very fast. Whereas Coimbatore has more than 25,000 small and medium enterprises (SMEs), Vishakhapatnam has been found to be suitable for industries such as mining, heavy manufacturing etc. Jaipur has been counted as a significant service sector investment while Ahmedabad has been hailed as an attractive investment in the manufacturing sector. As it continues to grow, rising disposable income and better infrastructure are also likely to lead to higher consumption and purchasing power in the country’s smaller cities, thereby generating faster growth. Research Reports predict that by 2025, tier II and III towns will account for 45% of India’s domestic consumption and 30% of its affluent households.
The unmet demand for goods and services in these cities offers immense opportunities for businesses keen to enter new markets and tap into one of the world’s highest earning populations. Other advantages that smaller cities offer over big ones include cheaper property and more affordable labour.
These cities pose cost advantages, lesser salary expectations and lesser price fluctuations to many businesses which are initiating a shift to these smaller cities. A comparative cheaper labour cost and low operation cost add to these advantages. In smaller towns, the proximity of various companies with each other gives rise to clusters, which results in the development of a specific location, aiding smaller companies in marketing and in finding the right customer. For developers, the return on investment is higher and much more stable as compared to in the metros. Neither of these smaller cities has been hit and affected by global factors as felt in the metros. With an increase in employment opportunities (with a major change perceived in the manufacturing and service sector), home buyers are increasingly becoming more interested in the properties in these emerging cities. The improvement in connectivity has made these cities more accessible and hassle free. These cities also provide great opportunities for investors like NRI's who want to avoid going vertical and prefer a bungalow spread over large acres of land. Also tier II and III cities mitigate the disadvantages that are associated with metros - of a reduced quality of life, high cost of living, expensive transportation, huge traffic and travel time, expensive house rent and education. Whereas metros are suffering various drawbacks in projects like delay in execution, overall slowdown in demand and a dip in the supply, smaller cities like Pune are experiencing increased demands for mid-segment housing. The overcrowding in Tier I cities have compelled people to move out to open spaces with wider infrastructure, and nature-friendly ways. Tier II and Tier III cities faces lesser constraints like easy approval of FDI for projects in these cities. This can be made easier by the Government through policies and tax level initiatives and benefits that could entice people to stay back in the city.
COVID-19 impact on office space
During the lockdown, India coped very well with the shift in workplace and has continued to do so with limited re-opening. We do believe that going forward; the workplace will no longer be a single location but an ecosystem driven by locations and experiences, to support convenience, functionality and wellbeing. As infections increased drastically, companies worldwide announced remote working for employees to contain the virus spread, triggering a debate if work-from-home could replace office spaces in future. While the answer to that question depends on the ultimate level of success achieved by businesses through remote working, a near-term jolt to the commercial real estate segment in India is unavoidable. Even though people are gradually coming back to work in sectors where working from home is not an option, remote working continues to be the main way of functioning for companies as of now.
Even though developers in this segment remain optimistic, because of better access to liquidity and lower risk of defaults, the impact of the virus is visible on the office space. Many corporates and co-working players continued to defer their expansion plans following the pandemic. The remote working concept contributed to the fall in demand for office space. Increased office space consolidation and optimisation strategies of corporate occupiers, resulted in subdued net absorption levels, which could not keep pace with new completions. Experts, however, expect the pre-COVID-19 growth momentum in this segment to get restored eventually once things settle down. However, the sector continues to attract investors, because of its strong fundamentals and experts feel that investment in this asset class will remain positive in the medium-to-long term.
COVID-19 impact on mall developers
A total of 54 malls were expected to be launched across India in 2020. These projections were, however, made before the Coronavirus pandemic struck. As a result, only five news malls started operations in some of the leading cities of the country. This reflects the state of crisis in India’s retail segment. The anxiety surrounding the virus spread resulted in footfall in malls in India reducing by half before the government ordered a complete lockdown. This segment continues to suffer even though the government has lifted restrictions, allowing malls to operate, albeit by following strict rules. Low footfalls and subsequent closure of malls will impact developers’ debt servicing against the project. Even a relaxation from banks for the short-to-medium term should not have a big impact. However, if the virus scare continues beyond 1-2 quarters, debt servicing challenges may last for a longer period. Eventually, footfalls will limp back to normalcy as people will take time to regain confidence to throng public places in large numbers. This will also bring a fundamental shift in how mall owners will now look at their properties. An increased focus on air quality, improving hygiene and sanitisation and awareness is what will bring back people to their malls.
COVID-19 impact on warehousing
On the assumption that e-commerce will grow significantly in the post-COVID-19 world, there have been projections that the warehousing sector in India would stand to gain immensely. More importantly, this growth will not be limited only to the big cities but it will be spread across smaller cities also. As the demand grows in the long term, a significant capacity increase could be expected in 30-35 new tier-2 and tier-3 cities.
The New Tenancy Act to create another wave of affordable rental housing
The new Act once implemented across the states would release over one crore vacant houses locked in the clutches of the old Act and promote investments into the real estate sector. Experts feel that the pandemic – induced reforms such as liquidity infusion, Housing For All, Affordable Rental Housing policy, Stamp Duty reduction across the states, Revision of the Reconer/circle rates and income tax reliefs will be a great booster and this have opened up avenues for fresh investments into the sector.
Model Tenancy Act
Ø The existing rent control laws are restricting the growth of rental housing and discourage owners from renting out their vacant houses due to fear of repossession. One of the potential measures to unlock the vacant house is to bringing transparency and accountability in the existing system of renting of premises and to balance the interests of both the property owner and tenant in a judicious manner.
Ø States can adopt the Act as it is with fresh legislation, since it is a state subject, or they can amend their existing rent acts to factor in the new MTA.
Ø The Act aims to formalise the shadow market of rental housing, unlock vacant properties, increase rental yields, ease/remove exploitative practices, reduce procedural barriers in registration, and increase transparency and discipline. States will set up a grievance redressal mechanism comprising of Rent Authority, Rent Court and Rent Tribunal to provide fast-track resolution of disputes. Disposal of a complaint/appeal by the Rent Court and the Rent Tribunal will be mandatory within 60 days. There is no monetary ceiling.
Ø At present, in many old properties let out under archaic rent-control Acts, such ceilings have left landlords stuck with outdated rent amounts. Subletting of premises can only be done with the prior consent of the landlord, and no structural change can be done by the tenant without the written consent of the landlord.
Ø The security deposit to be paid by the tenant should not exceed 2 months’ rent for residential property (6 months’ rent in case of non-residential property), and should be a minimum of one month’s rent for non-residential property.
Ø The Act lists the kinds of repairs each party would be responsible for, with the proviso that money for repairs can be deducted from the security deposit or rent, as applicable, if a party refuses to carry out their share of the work.
Ø No arbitrary eviction of a tenant can be done during currency of the tenancy period, except in accordance with provisions of the Act.
Ø The Rent Court can allow repossession by the landlord if the tenant misuses the premises, after being served a notice by the landowner. Misuse of the premises, as defined, includes public nuisance, damage, or its use for “immoral or illegal purposes”. If the tenant refuses to vacate, the landlord can claim double the monthly rent for two months, and four times the monthly rent thereafter.