COVID-19 is an inflection point for commercial real estate with developers struggling to strike a balance between ensuring compliance to policy regulations, financing, market demand and labour shortage.
The COVID-19 pandemic continues to spread rapidly, jolting global economic growth. In the absence of an established treatment, social distancing has emerged as the only choice to contain the corona spread. This has prompted a global lockdown, which in turn stoked apprehensions of imminent economic crisis across the world, including India. Barclays has pegged the expected losses to the Indian economy alone at $234.4 billion.
The impact of COVID-19 on the real estate sector in India is evident through a halt on site visits, documentation, negotiations, and closure of deals. A Naredco report foresees the Indian realty sector enduring losses to the tune of Rs 1 lakh crore due to the pandemic. The festive season this year was gloomy for the real estate sector with no new projects being launched amid low sales. In the commercial real estate sector, the impact is visible through a delay in leases, a halt in expansion plans of office spaces, and almost negligible sales due to the shutdown of malls.
The magnitude of the pandemic has sparked concerns on whether the economy will revive and if the commercial real estate sector can bounce back. It is to be noted that COVID-19 is but a passing phase. The government is already taking a series of proactive measures to arrest the spread of the pandemic through a nationwide lockdown and social distancing. These measures have met with great success till now as evident through a linear rather than exponential pattern of growth in COVID-19 cases. In fact, the entire world is amazed at the way India has managed to contain the spread of this deadly virus so far. Furthermore, the Indian government has announced a Rs 1,70,000-crore package to aid the vulnerable section of the society and put a three-month moratorium on all loans. These steps will be instrumental in putting the Indian economy back on track.
A Savills report highlights that the post-COVID-19 scenario will give a fresh start to the realty sector with greater intensity and vigour than it was in the pre-COVID stage. It is noteworthy that the commercial real estate segment has been insulated from the slowdown in the past. Riding the wave of absorptions, relocations, expansions in the past 18 months, it has been on the investors’ radar. The noteworthy fact is that in the first three quarters of 2019 alone, it attracted private equity investments to the tune of approximately $3 billion. Going forward, we foresee commercial real estate to continue being an attractive avenue for investors. The falling gold and crude oil prices in the current scenario further enhance the prospects for commercial real estate. With increased marginalisation of China by almost all the countries of the world, India can become a favourite destination for manufacturing companies.
Furthermore, with the current prices being at a record low level, these are henceforth expected to rise owing to a huge pent-up demand once the lockdown is lifted. According to a report by ICRA, the office space segment will be somewhat resilient to the slowdown with rents likely to be paid on time as they comprise a miniscule portion of firms’ overheads. Going forward, the Business Process Outsourcing (BPO) and IT/ITes segments are expected to propel the demand for office spaces. It is also expected that industrial, frontier segments like co-living will thrive due to their good return potential.
With the lockdown in place, both developers and consumers are increasingly relying on digital technologies to sustain the momentum. Developers are now banking on Virtual Reality, walkthroughs, chatbots to interact with customers. It can be safely assumed that the post-COVID-19 scenario will redefine the sector. Technology will assume an even more paramount role in the endeavour to offer curated experiences to customers. There will be a greater focus on automation, mechanization among other alternatives to reduce the dependency on labour. In the real estate supply chain model, the COVID-19 crisis has instilled an awareness of geography-specific supply chain challenges. Going forward, developers will increasingly seek alternative suppliers, build a comprehensive backup model to overcome disruption in supply chain management. The role of risk mitigation through robust data analytics cannot be underestimated here. Equally significant will be hygiene and wellness measures which will prompt the revamping of existing commercial spaces.
Architectural changes in office buildings such as better ventilation, social distancing etc. will cater for recurrence of Covid 19 like situations. Also, there will be a renewed focus on co-working spaces as consumers will increasingly seek flexible working models. Large investments in the health sector by both the government and private sector are expected in the next 5-6 years. In the retail segment, landlords are likely to reconsider their rental collection models based on high base rent or gross turnover, whichever is higher, to a no or less base rent and high gross turnover model. Until then, it can be concluded that COVID-19 is an inflection point for commercial real estate with developers struggling to strike a balance between ensuring compliance to policy regulations, financing, market demand and labour shortage.
(By Ved Parkash Dudeja, Vice Chairman, Rail Land Development Authority)