COVID-19: Will it reset the Indian Real Estate sector?

COVID-19: Will it reset the Indian Real Estate sector?

Commercial real estate, Indian real estate impact, Covid-19, Corona virus, Anarock

The Coronavirus outbreak, which originated in China, has infected lakhs of people worldwide. Simultaneously, it has disrupted industries, trade, and business cycles, thus halting global economic activity significantly. Indian real estate sector, which was already struggling to re-emerge from the past turbulence of structural changes, policy reforms, and the liquidity crisis, is now set to witness another major fallout.

Unfortunately, 2020 wasn't very different. Country-wide lockdown until mid-April has halted all activities. As evident, project sites are shut, site visits have stopped, and construction activity has come to a grinding halt, eventually impacting housing sales. Also, developers have deferred their new project launches for an unknown period.

The usually robust commercial real estate is also not immune to the Covid-19 fallout. Corporate occupiers are seen delaying their leasing decisions and still several MNCs and businesses are testing new waters of the workfrom-home option. If proved successful, it could impact leasing activities in the future. Retail businesses, highly dependent on consumer spending, are also witnessing a momentary slowdown and reduced interest from global brands who may now consider revising their expansion plans.

Indian Real Estate: Pre-COVID-19 Outbreak Overview

Market Size & GDP Contribution
Indian real estate was just beginning to come to terms with the multiple reforms and changes brought in by demonetization, RERA, GST, IBC, and subvention scheme ban. While the sector found it difficult to align with the slew of reforms and changes, these measures helped fortify the sector and instil transparency, accountability and fiscal discipline over the last few years. While the sector was on a growth trajectory since the last few years and was likely to emerge stronger than before, the current coronavirus lockdown has surely put brakes on its growth momentum. Industry estimates of the Indian real estate market, prior to COVID-19 outbreak, was projected to be USD 650 Bn by 2025 and USD 1,000 Bn by 2030. This certainly seems tough amidst the current circumstances.

After agriculture, real estate is the largest employment generator in the country. The sector creates tremendous opportunities for the skilled and unskilled workforce. It has also been instrumental in employing large masses of migratory populations that come to the metropolitan cities in search of work. As per industry estimates, 90% of the workforce employed in real estate and construction sector is engaged in the construction of buildings, while the rest 10% is involved in building completion, finishing, electrical, plumbing, other installation services, demolition and site preparation. Over 80% of the employment in real estate and construction constitutes of minimally skilled workforce, while skilled workforce accounts for over 9% share, and the remaining are spread across work classes such as clerical, technicians and engineers.
As per the Economic Survey 2017-181, employment is expected to grow at a compounded rate of 5%. These figures are mainly for construction and development.

However, since majority workers are immigrants, labour shortage could emerge as a major challenge for the sector post COVID-19’s current lockdown. Several migrant workers who were forcefully trying to migrate to their hometown were stopped by the authorities and forcefully quarantined at the state borders. While a few
are likely to go back to their villages, others may come back to the project sites sooner. As a result, construction activities are set to be delayed with many developers and contractors facing shortage of labour and a more pronounced liquidity crisis. As is, the Indian residential sector was caught in the grip of delayed project deliveries, liquidity squeeze for developers, high unsold inventory and a growing proportion of stalled projects.

The liquidity crisis also led to significant job losses in the past. As per industry estimates, around 300,000 workers had to be laid off as developers were unable to process their bills. While many developers were overleveraged, the current pandemic has made the situation grim to sustain employment levels. It is anticipated that in the short-to-medium term, employment levels are likely to be affected significantly.
Apart from construction, the retail sector is another major source of employment. As malls and non-essential business establishments have been currently shut down and will continue to remain so until the pandemic is under control, we believe that there will be a reduction in manpower to the tune of 10% to 20%,
primarily those employed in the housekeeping, merchandising and maintenance of facilities.

FDI in Construction 
Foreign Direct Investment (FDI) in construction development: townships, housing, built-up infrastructure currently accounts for only 6% of the total inflows from April 2000 to December 2019. A quick comparison of the absolute inflows between Apr-Dec 2017 with Apr-Dec 2019 shows that the investments in the sector in 2019 reduced by 7% as compared to 2017, indicating that FDI has already slowed down. Amidst the  COVID-19 uncertainty, it is anticipated that the forthcoming quarter of the current year may witness a further decline in FDI inflows into the sector. The Indian real estate sector needs to exhibit immense resilience to overcome the current situation imposed by the novel coronavirus.

The sector has been successful in overcoming many challenges in the past and has stood up in the most turbulent times. Unfortunately, the testing period and the trials keep coming back at regular intervals and it is surely going to hurt the sector but may also fortify for the years to come. India’s improved rank on Ease of Doing Business and the courage to implement reforms such as DeMo, RERA, and IBC are indeed creditworthy. These are expected to yield fruitful results in the future and help establish Indian real estate
as a preferred destination for global investors, occupiers, and homebuyers.

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