Impact of Covid 19 on commercial real estate in India: Sachin- Investors Clinic

--By Sachin Arora, Director of Investors Clinic

Covid has hit majorly across sectors and businesses in the country. Construction, consumer durables, real estate, mining, manufacturing are just a few examples of segments that were affected by Covid. The agriculture industry remained a bright area; reverse migration was a significant factor in this. Corporate are offering to work from home which has led to closed offices and malls, resulting in millions of square feet of unoccupied space; adding to the current inventory of office spaces. Brands and shops have either abandoned malls and high streets or renegotiated on their leases. On the brighter side, people are becoming more aware of the value of owning a house, which has resulted in an increase in residential housing. Demand for large residences in open environments, primarily integrated townships, increased dramatically in Tier 2/3 cities.

The commercial real estate (CRE) sector is important because it directly influences the economic cycle. If the social distance becomes the norm after the second wave, consumers may require greater areas to work from in the long term. It is also probable that better security, health, and safety facilities and services will be needed. An increase in demand for CRE, such as shopping malls and office buildings, is an important indicator of economic development. The recent improvement in the sale of commercial properties demonstrates that investors and purchasers understand the importance of this sector and have faith in the returns provided by CRE.

The investment in commercial real-estate is expected to improve with USD rates going up to INR. The rupee depreciation has increased the attractiveness of investment possibilities for NRIs. Commercial real estate, which has a greater return and appreciation potential, has drawn the interest of real estate investors. Consumer expectations may alter owing to the fact that offices may not be operational for several months, and even if they are, it will take time to open in full capacity. Since last year, this has been a source of concern. 

No doubt, there is a downward movement in the acquisition of CRE to about 10 percent, which was seen during both the lockdowns. This was possible due to negotiated and better deals offered by the real-estate developers and owners to the occupiers. Never in the history of CRE, this kind of step has been undertaken. It was an intelligent move from the developers to retain tenants at this juncture. In comparison to other segments within the real estate industry, the office leasing segment had the least impact on operating cash flows during FY2021, according to ICRA's newest research. 

Tenants would have a great opportunity to lease quality assets at better rates for the next 3-4 quarters. Developers would want their cash flows intact and hence the market may tend towards being a tenant-friendly market.

With the emergence of new concepts of REITS, fractional ownership (FO), and co-working managed spaces, CRE is expected to keep its momentum for the next 3-4 years. In the next 2-3 years Fractional Ownership is expected to be anywhere between 2.5-3 billion USD. The reason for the sudden rush is the lucrative returns offered by FO. The concept of co-working will also remain high with the onset of pandemic as more and more people are expected to start their own ventures. 

People, especially in tough times, require offices or business enterprises, and they must buy for essentials even if they are not permitted to go out in groups. And these demands aren't going away; the only thing that will alter is the need for larger properties with better yields. The second wave of the epidemic may have affected emotions since occupiers took a careful approach. In the next few quarters, investor sentiment will be determined by India's ability to restrict the spread of COVID and inoculate its people.

We may conclude that Covid 19 had an impact on commercial real estate, but as soon as offices open, all businesses will be back on track, and there's a potential that following Covid, we'll witness a commercial real estate boom.