COVID – 19 impact on Real Estate Sector

COVID – 19 impact on Real Estate Sector
25/04/2020 , by , in EXPERT ZONE

Authored by CMA B Mallikarjun Gupta – Chief Taxologist, Logo Infosoft.

CMA Bhogavalli Mallikarjuna Gupta is the Chief Taxologist at Logo Infosoft. He is member of National Council for Indirect Taxes, ASSOCHAM & GST & Customs Committee at FTCCI (Federation of Telangana Chamber of Commerce & Industry). He is also an Associate member of the Institute of Cost Accountants of India (ICAI) and has a Master’s degree in Financial Management and Post Graduate Diploma in Computer Sciences.

 

The crisis started in a province called Wuhan in China, and it has spread across the globe and has created a huge impact on lives and economies world over. A recent study by the IMF states that most of the countries will go into negative growth, and India’s growth will shrink to 1.9%. India is facing lockdown for over 30 days, and it will continue for another ten days. Every sector is impacted by the lockdown, with severe impact on the real estate & construction sector.

Employment

The real estate and construction industry employs around 490 million people, includes both skilled and unskilled labor. The nationwide lockdown sparked reverse migration of labor, leading to a shortage of labor in the short run.

Residential Sector

Existing projects are expected to be delayed by a period not less than three months, and the exact delay would be known only when the industry starts working at full capacity. There will be no new project launches in the next year. The demand is likely to come from the Tier – 2 & 3 cites with work from home becoming a reality and the cost of office space becoming expensive due to social distance. There will be a demand for the three- and two-bedroom flats down the line as every employee wishes to have a dedicated home office for uninterrupted working.

Employees will be moving to hometowns for two reasons: one is due to the new reality of work from home, and secondly all the metros becoming hot spots for the disease. The inflow has taken a deep dive, and the same can be increased by more aggressive digital promotions, virtual site visits, and providing space in unsold inventory for home office provisions. Though the cash outflow is there, it will minimize them from getting into red and also ensure steady cash flow and remain afloat. All the premium players will be looking out for the new locations away from the metropolitan cities, and there will be consolidation in the market space due to the fund crunch.

Commercial

This category consists of mainly office spaces, and most of them are let on lease. The lease composition is about 40% space occupied by US-based companies, another 10% by the Europe based companies, and the rest of them by the Indian Companies. The demand for office space may not go up in the immediate future as both US, and Europe are battered by COVID19 very badly. The commercial segment is going to take a deep hit as the lockdown has made work from home a reality, and also companies will rethink their strategy of spending money on plush offices and their maintenance. Even after the relaxation of the lockdown, most of the ITES companies may continue to work from home only except for critical and emergency services. This means all ongoing projects will take a hit, and they will get delayed, forcing reduced demand for office spaces.

The players can retain existing tenants or attract new tenants if they invent in thermal image scanning, filtration of centralized air conditioning, sanitization equipment, and provide wellness in the work space. These changes, although cost intensive, will not only attract new tenants who are looking for safer places and also retain the existing tenants.

Rental

Shopping at the mall and watching movies is not the priority or on the To-Do list of individuals, and they are not essential services. Even after easing or lifting of the lockdown, they are going to be closed as social gathering at public places will take time to gain normalcy. This will lead to a change in rentals from a fixed amount to a revenue-based model. There will be many chains that will be looking to minimize the spend on retail establishments and divert it to the e-commerce platforms and also spend more money on the digital platforms for generating leads and sales.

The brighter side

The real estate and construction sector consists of more than 100 allied industries. In that, many of them will not be impacted if they approach the current crisis with a business opportunity. The furniture industry especially dealing with office furniture, will show a big jump on an immediate basis as employees will be purchasing tables and chairs with better ergonomics, to safeguard themselves from back pains, which is reportedly on the rise already. There are instances where companies have purchased and provided them to employees.

Another industry that is going to see demand is for soundproofing, as it is required to have noise-free home office to work more efficiently without disturbances. There can and will be new innovations coming into this space, providing immediate solutions for home offices with proper ambiance, comfort, and healthy space with frugal pricing and faster delivery. The companies and employees will not shy away from spending on these necessities rather than expenditure on fuel and wasting time on travel.

The overall impact is there in the near term but not in the long run as stakeholders adapt to business environment changes, build resilient and future proof business operations and invest in efficient technology. The sector is going to see a remarkable difference with automation like 3-D printing and prefabricated structures. As these are cost-intensive, the only mantra to stay afloat is innovation and moving more into the formal sector. Adoption of cloud based solutions will also ensure full control on the cost and access to real time data of the projects to help in effective decision making. Construction activity is slowly picking up in many locations due to relaxation of the lockdown post April 20.  The industry will be able to survive with extension of loan moratorium specifically to the real estate sector, infusion of more funds for the National Housing Board and Housing Finance Companies.

 

 

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