Despite the current situation, the real estate market looks attractive for opportunistic home buyers and investors. In this QnA, Aashish Agarwal, Senior Director, Valuation & Advisory Services, analyses the current market situation and shares how real estate investors can benefit the most during these challenging times.
Q1. How is the current market situation different from the financial crisis of 2008?
Aashish: In 2008, the global financial crisis hit a booming real estate market. This time around, the Indian real estate sector was already going through a prolonged period of pain for various reasons such as economic stress, high leverage, tight liquidity and sluggish sales. Thus, the crisis will have a deeper and more profound impact compared to what we have seen in the past. However, there are some positives as well – the most important being market maturity. The 2008 financial crisis was followed by a period of incautious lending which created a pile of non-performing assets, but investors are wiser now. Customer-centric developers with strong corporate governance standards and focus on execution will have access to capital and come out stronger, while weaker players will struggle for liquidity and survival.
Q2. There are many market reports that suggest real estate prices will crash? What is your assessment?
Aashish: The answer will vary at the city level, micro-market level and even down to the project. It is certain that buyers and investors will have more bargaining power and developers will be willing to go the extra mile to get deals done. But to imagine an across the board price drop, it is worth examining if that’s feasible, how will prices drop and by how much? Material or labour prices haven’t reduced; in fact, developers have absorbed cost escalations over the past few years. For land that has already been acquired or under development, there are probably only three ways for prices to come down – reduction in Government levies, reduction in cost of capital for the developer or the developer taking a hit on already squeezed margins. These factors will vary with geography, quality of the developer, his financial position and the sales velocity of the project. Under-construction projects require deeper diligence to assess the developer’s ability to complete the project and the risk of home buyers’ capital getting locked up in litigation / insolvency proceedings.
Q3. What are the opportunities for home buyers and investors during this downturn?
Aashish: Thanks to the depreciation in the rupee, the biggest opportunity at this point is for NRIs. At $80 bn, India is the world’s largest recipient of remittances. Given the focus on targeting buyers remotely, developers have been actively marketing to this pool of overseas buyers, many of whom have an enhanced desire to create and maintain assets in India. The market is also attractive for opportunistic buyers in every segment, and developers have been actively doing deals even in this downturn. The financial incentives in terms of reduced GST, interest subvention (in one of the lowest interest rate regimes) and tax benefits make affordable housing the most attractive buying opportunity, but the challenge is that some of these are limited-duration incentives, coinciding with the world’s deepest crisis. For financially secure buyers and multiple-income households who are working in more resilient sectors, there has probably never been a better opportunity to buy a home.
Q4. What will be impact of COVID 2019 on commercial leasing?
Aashish: 2019 was a record year, with the highest ever gross absorption of around 60 mn sq.ft. During Q1 2020, office gross absorption across the top seven cities rose marginally by 4% to 12.2 mn sq.ft. While the IT sector will see short-term stress, the depreciation in the rupee will benefit outsourcing. While verticals like retail, travel and energy will see more rationalisation of clients’ budgets, the impact will be felt less in banking, healthcare and telecom.
COVID has disrupted not just India, but the global economy and it will take a few quarters for things to recover. The IMF has forecast India’s GDP growth to slow down to 1.9% in 2020, but a sharp recovery of 7.4% in 2021. While decision making will be delayed, there is nothing to suggest that India’s economic strength or attractiveness as an investment or outsourcing destination over the medium to long term has been impacted by this pandemic.
Q5. We keep hearing about the ‘new normal’ – what would be the new normal for the real estate industry once the situation returns to normal?
Aashish: COVID will have a transformational impact on social behaviour and the real estate industry will need to adapt to the changes in expectations from the built environment. Social distancing will change everything from workplace density, utilisation of collaboration spaces, circulation space in commercial and retail buildings and configuration of apartments – be it balconies or personal space for work.
Millennials are notorious for not saving up for homes or retirement, and not investing enough in their futures. They have been blamed for things like the automobile sector slump because of their preference for shared economy models and propensity to spend money on services like food and travel. However, surveys suggest that millennials and Gen Z will come out of this crisis more prudent than ever, with a strong desire to build assets, including home ownership.
Finally, this pandemic has shaken up the industry once again to realise that this is not the first, nor will be the last crisis. Natural calamities, financial stress, geo-political risks and disruption due to challenges are the new normal – resilience and ability to adapt to these disruptions will be key for survival and growth.