by Sankey Prasad FRICS, Chairman & Managing Director (India), Colliers
It is no surprise that the real estate sector, which is the second-largest employer in the country, has had a tumultuous ride over the last few years. While the residential sector was in a continued state of a slowdown since 2014, the commercial office sector was going from strength to strength, touching a new high in 2019. However, in 2020, as the world started grappling with the pandemic, India’s real estate sector began seeing signs of a slowdown. Due to the pandemic and the resultant lockdown last year, the government announced a fiscal stimulus package that relieved developers and homebuyers. The relief came in the form of deduction of interest on housing loans, an extension of the credit-linked subsidy scheme, focus on affordable housing through Pradhan Mantri Awas Yojana, amongst other initiatives.
The sector contributes ~6-7% to India’s GDP and can give a much-needed push to the economy and contribute to about 13% of the GDP by 2025. In such a scenario, industry stakeholders can explore ways to provide maximum value to buyers, focusing on health and wellness.
Tier I developers capturing latent demand in residential sector
Over the last year, the market has seen high affordability with stable home prices, decade-low interest rates, in addition to the freebies offered by developers. The high demand for homes after the first wave signals a latent demand in the market after years of subdued activity. In such a scenario, homebuyers prefer developers with a solid track record in project execution and delivery. As a result, we expect that solid grade A developers with good delivery track records and corporate governance practices will likely gain strength. In contrast, smaller developers are likely to see a slowdown. This is further cemented by reports that the top-10 listed companies witnessed a 61% growth in the October-December 2020 quarter, even as the broader market remained 24% below the pre-Covid levels.
Consolidation to hasten
Developers focusing on executing and completing existing projects and adhering to RERA guidelines will find themselves favorable to deleverage themselves. And such a scenario will also hasten consolidation in the space, wherein more prominent developers with adequate liquidity will likely take over projects of smaller developers with land parcels and low execution capacity.
Opportune time for investment.
From an investment standpoint, this is an opportune time for retail investors with high affordability and ample leeway for negotiation in the market. Further, as people continue to work from home, demand larger homes in the peripheral areas of tier I cities, or even second homes, is gaining prominence. People spend more time at home and are being more discerning, with safe outdoor spaces, quality infrastructure, proximity to green spaces. As a result, we expect prices to remain broadly steady over the next few months, in addition to freebies offered by developers.
Office sector’s recovery to get delayed
The majority of India’s workforce has been working from home for over a year, at a time when other companies in other countries have started reopening offices. Corporate leasing decisions continue to be delayed, and occupiers are likely to adopt a hybrid working model with greater flexibility to employees. Landlords are being wise to the demands of occupiers and giving more flexibility in lease terms. Overall, we expect net absorption to be slightly lower than last year due to the second wave of Covid and further postponement of leasing decisions by occupiers. Occupiers are likely to optimize their corporate office portfolio by exploring options like relocating to cheaper locations, adopting a hub-and-spoke model of offices, etc.
IT Policy could spur growth in smaller towns
In 2020, the government eased rules regarding registration, submission of bank guarantees, remote working, and other norms for other service providers (OSP) involved in the IT and business process outsourcing (BPO) sectors. This could increase the ease of doing business and increase the competitiveness of Indian IT-BPO firms, and boost start-up culture in tier II and tier III cities which could also boost physical and social infrastructure in such towns.
In 2020, the government eased rules regarding registration, submission of bank guarantees, remote working, and other norms for other service providers (OSP) involved in the IT and business process outsourcing (BPO) sectors. This could increase the ease of doing business and increase the competitiveness of Indian IT-BPO firms, and boost start-up culture in tier II and tier III cities which could also boost physical and social infrastructure in such towns.
India’s industrial and warehousing sector building its strength
The industrial sector is experiencing renewed vigor over the last few years, led by increased demand from e-commerce players and third-party logistics providers. Several institutional investors are buying into this space. Bolstered, several institutional players such as Blackstone, Logos, GIC, and CapitaLand have formed joint ventures with local developers to set up and buy industrial parks and fulfillment centers across the country. We expect more significant action in this space, which has immense potential and has been fragmented.
While specific segments such as warehousing, data centers are likely to pick up pace in 2021, the commercial office segment will see recovery by 2022. Meanwhile, the demand for affordable and mid-segment housing projects will hinge upon the broader economy and employment growth. Overall, the Indian real estate sector is on the cusp of corporatization, and over the next few years, we will see more transparency and accountability in the industry. Therefore, it is imperative that the government extend support, reduce red-tape, and make the approval process less time-consuming, which will help the construction sector have a multiplier effect on other sectors.
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