Impact of second wave of COVID‑19 on Indian Real Estate

Like looking both ways before crossing the street and then getting hit by a submarine.
“Because it’s been the craziest year ever.”
Clarke Smith, 9, Beverly Hills, Mich.

In March 2020, while economists were debating if the business recovery pattern post outbreak of COVID-19 will be 'V', 'U', 'W' or 'L' shaped. Now, during a surging COVID-19's 2nd wave in India, we are sure it is likely to be 'W' shaped recovery knowing the possibilities of multiple COVID-19 waves before it subsidizes. Yes, we are still living in uncertain times and it will continue for coming few quarters.

Contrary to the spring of 2020, in April of 2021, the Government of India (GOI) has allowed World Health Organization (WHO) approved vaccine makers to begin manufacturing their vaccines in India, thus improving manifold the availability of vaccines. With the GOI gearing-up to roll out vaccination program aggressively; it is highly possible that by Q4 2021 large proportion of our population will be vaccinated.

India has witnessed close to 3.0L COVID-19 daily cases as of April 19, 2021 which is over three times of the daily peak reported in September 2020. Further, the cases are still on a rise in India. Few cities / states have announced partial lockdown with a possibility of complete lockdown in the event if cases continue to rise. However, business activities are likely to resume faster than unlock measures adopted last year.

Earlier this year, global rating agencies including Fitch, Moody's, International Monetary Fund (IMF) and others have projected India's growth estimates for FY 2022 upwards of 12%. But it is likely they will relook their projections on account of severe COVID-19’s 2nd wave in April 2021.

Analyzing the impact of COVID-19 on different segments on real estate in 2020, residential sector performed better than expected, warehousing was also resilient owing to sharp growth of e-commerce during crisis, whereas office, retail and hospitality struggled as expected. Business recovery for the year 2021 will be determined based on the speed of recovery from COVID-19's second wave. At this juncture, residential sector will continue to do well, and warehousing sector will also remain strong in the year 2021.

However, office leasing may continue to remain low and net absorption rate may not rise compared to 2020 and it is likely to drop further in 2021. A few transactions concluded in the year 2020 were spill overs from the pre pandemic period. Currently, companies are strategizing on their real estate footprint and lacks clarity regarding resuming office in short term. A quite a few companies are evaluating a hybrid model of work and are expected to downsize their facilities post expiry of lease lock-in periods. In early this year, corporates were expecting to resume office by H2 2021, but it may get pushed to early 2022, backed by the success of vaccine drive and developing herd immunity against the virus.

Retail was performing at 40% - 50% levels compared to pre pandemic period in January – February 2021. Recovery phase will stretch now and is expected to reach 40% - 50% levels (of pre-pandemic levels) only by September 2021. Limited absorption is expected in the year 2021; further retailers are expected to negotiate on the rentals.

Hospitality's future and timelines will be similar as that of retail. Domestic leisure hospitality sector performed better than pre-pandemic period during Q4 2020 and Q1 2021. But Q2 2021 will witness drop-in occupancy rates even for this segment. Domestic leisure is likely to start performing well from September 2021. Business travel being restricted, business demand in hospitality was at 40% - 50% levels (of pre-pandemic level) during November 2020 and February 2021. Recovery for business demand is hospitality is likely to be slow and hotel occupancies are expected to drop further to 15% to 20% in Q2 2021.It is likely to rebound only by August - September 2021.

Co-Living sector was gradually recovering at the onset of 2021. With a few offices resuming work and colleges have on-campus classes. During this period occupancy levels in Co-Living facilities was estimated between 35% and 40%. However, this likely to remain same or drop to 10% in Q2 2021 and start picking up from Q3 2021 onwards.

Post outbreak of COVID-19, HNI investors are evaluating commercial development with emphasis on available lock-in period or good tenants who has invested in fit-out; land on growth corridors and even residential developments located in prime locations with a market comparable yield. These parameters will remain same and HNIs will continue to invest in these assets.

Last year, post the outbreak of COVID-19, according to Government’s fiscal incentive plan, real estate developers have got their loans restructured and benefited from low interest rates. Even though, their short-term pain is managed but at the cost of a deteriorating P&L. New funding from NBFCs and HFCs may remain low in 2021 as expected. Government of India has not announced any fiscal support after outbreak of COVID-19’s 2nd wave. They may announce fiscal support in coming weeks.

In summary, the COVID-19 2nd wave may delay the economic recovery by one or two quarters. The quantum of impact will be dictated by the duration and severity of 2nd wave which is currently unknown. Post-pandemic, the recovery path is likely to be same – the expected shift to a fast recovery and growth may happen as envisaged before outbreak of 2nd wave. However, prolonged recovery period may further strengthen the changes leading to the acceptance as the normal of pandemic specific real estate strategies including the partial workforce operating from home (Work-From-Home, WFH) permanently or adoption of hybrid work model; lesser business travel; rise of ecommerce share.

This pandemic has affected and changed every aspect of life. Many of the pre-pandemic accepted norms and practices have changed. We do not have the benefit of hindsight to understand which are temporary and will be permanent. Real Estate will also not be the same again, commercial, retail and hospitality may remain volatile for longer period.

Business recovery is likely to delayed by two quarters but revival path to remain the same.