Investment Strategy for Indian Real Estate post COVID-19

Investment Strategy for Indian Real Estate post-COVID-19

By
Adithya Mokshagundam,23-Apr-2020
Assetmonk-Investment-strategy-Indian-Real-Estate

COVID-19 declared a pandemic is the cause of a drastic turnaround across the world. The world once considered a global village is currently under lockdown. As per IMF, the projection of the global economy in 2020 is going to be gloomy. Apart from India and China, it predicts a negative growth rate for all the major economies. Currently, the countries are under lockdown and the trade of goods is restricted. This establishes that in the near future the impact of COVID-19 is going to be felt more intensively. A slew of measures was introduced by America and the European Union to tackle the economic downturn.

As a developing country, the impact of COVID-19 on the Indian economy is going to be huge. The GDP growth rate which already projected at a lower value before COVID -19, will be further reduced. The IMF report has projected a GDP growth rate of 1.9 for 2020. India is one of the few countries which have projected a positive growth rate during this period even though it is way less than the actual predicted GDP. The major import of India, crude oil is undergoing a price war and this has led to prices drop to the lowest value in the last decade. Also due to lockdown, the consumption of oil is reduced, which will positively benefit the economy.

The government has announced a staggered exit to revive the economy from lockdown. Priority to be given to both lives and livelihood and there is a need to focus on the relaxation of the constraints and the manner that it should be done.

This article deals with the impact of lockdown and the way forward, especially in real estate.

Impact of Lockdown on Real Estate

Real estate is one of the labor-intensive industries. Due to uncertainties during the lockdown, its industry is facing many problems. The intensity of the impact across the sub-segments of real estate like residential, commercial, etc is varied. The proposal of Staggered exit by the government will likely help the industry. But there’s a need to take into account the following points.

  1. As the industry is labor-intensive there should be adequate precautions to be taken to ensure social distancing.
  2. As many laborers are migrant workers there should not be travel restrictions to ensure they can reach the work location.
  3. It is preferable to open the Manufacturing industry prior to real estate to ensure there are no supply constraints once the industry is open.
  4. Reduction in stamp duty to encourage more registrations.
  5. Extension of relief in moratorium for builder/home loans.

The above-mentioned measures will ensure and help the industry to bounce back to the previous stage. In the short term, there will be a severe decrease in sales across subsections in the industry. There will be construction delays and new launches may not happen for a few months.

The impact of COVID-19 on various segments of real estate is described below.

  • Impact on Residential

    1. By the stage of construction, they are in
    2. The under-construction projects might face some problems due to COVID-19. They are

      1. There might be a delay in completing the existing under-construction projects in time.
      2. There might not be any new launches in the near future. The developers will focus on completing old projects.
      3. Sales are expected to be less as site visits might not be possible in the current situation.
    3. Type of residential :
      1. Luxury Segment

      2. As per the segment bifurcation, the luxury segment will be more impacted due to lockdown measures and COVID-19. The segment has a limited customer base and has most takers in NRI markets. Due to economic conditions under lockdown and various anti-immigration rules coming into the picture in the US and other regions is making it difficult for the NRI to invest a huge amount of money in luxury real estate.

        In India also HNI might think twice to commit huge money in luxury real estate and wait for a few years to realize the profit. Also as the government is more focused on affordable rather than luxury market segment the attraction of HNI and NRI in this segment can be reduced in the near future. Also, there may be a price correction in the segment as the sales will be reduced and might take time to reach their pre-COVID level.

      3. Compact/Budget Housing Segment

      4. On the other hand, the budget/compact segment will not be hugely impacted by the COVID-19. In the short- term sales will be impacted and there will be revenue loss. In the long term once, the lockdown is lifted the impact will be less. The segment has a huge customer base of people looking for a compact house. There is a huge latent demand for the segment.

        With the government encouraging the affordable segment will low GST rate and schemes like PMAY the segment is poised to come out of the COVID-19 intact. It also provides a suitable replacement for HNI as an alternative investment option in real estate. The money to be committed while taking a house is less and has a more realistic opportunity for a quick sell in the future.

        However, there is also a positive impact during this period for the sector
        1. The reduction in demand might be offset by the decrease in supply.
        2. There is a possibility that inventory overhang will be reduced
        3. The interest of home loans is reduced making this an attractive offer for the customer.
  • Impact on Commercial Real Estate

  • The impact on commercial real estate will be high. The sector can be further divided into malls/retail, Hospitality/coliving.

    1. Impact on Malls/retail/office

    2. The impact on retail and office spaces will be huge due to the lockdown. The number of leasing transactions are decreased in Q4 FY 2019-20 and are projected to be very minimal in Q1 FY 2020-21. The retail malls are closed leading to loss of revenue for the retailers, mall investors.

      The office sector is also undergoing a huge change during the lockdown. The number of companies preferring work from home for its employees is increasing. This will lead to less leasing of office spaces in the future by domestic companies. Most of the leasing transaction last year has been by foreign companies or MNC.

      Due to the situation in various countries, these MNC may freeze their leasing activities as they did during the 2009 crisis. The TCS has already informed that it is focussing on ensuring that most of its workforce to operate from home by 2025.

      The sector may take time to get over the crisis and reach the previous level of leasing. We need to observe a bit more on economic policies, the situation in global countries before investing.

      The analysts predict the social distancing might be the norm post lockdown also. This will lead to more digital shopping rather than physical stores in malls. The tendency of young generations to socialize in malls will also reduce. This will impact the functioning or profitability of retail malls. Many brands will focus on their online catalogs on websites like Amazon/Myntra/ Flipkart etc.

    3. Impact on Hospitality/ Co-living/co-working spaces/ Senior living

    4. Hospitality is one of the hardest-hit industries due to COVID-19. The travel is restricted and due to lockdown, all the hotels, restaurants, etc are closed. Post-COVID also it is understood and expected that hospitality is one of the last industries to be opened. During this period the rental returns from such ventures are extremely low. Most of the companies in the industry are having a cash crunch and are unable to honor the agreements. This has prompted investors to look for more alternative investments with a steady income.

      Coliving and co-working are some of the alternative investment options which are considered by global investors. Due to the change in the nature of work and also the change of circumstances will lead to increasing demand for new coliving and coworking spaces.

      This COVID-19 has hammered in the minds of the world population the requirement of a good co-living or senior livingor student living options. People are looking for accommodations where hygiene and cleanliness are a priority. The willingness to pay for these facilities is also increased. The students are also looking for good accommodations and are willing to pay extra for luxury facilities.

      Due to work culture being more shifted towards work from home the need for coworking spaces has increased. This is a cost-effective option for companies to invest rather than renting a big commercial space.

      Also, as these facilities are being offered as an alternative to the hospitality sector, large MNC is looking for such accommodations. They are pre-leasing the spaces for post lockdown scenarios. This ensures the market is poised to expand greatly post lockdown.

  • Government Support for Industry

    The proactive measure by the government and RBI

    1. Lower interest rates
    2. EMI moratorium on all loans for a period of 3 months.
    3. NCD is not part of the moratorium
    4. Relaxed export repatriation limits from 9 months to 15 months
    5. Capital conservation buffer may not be activated for a year
    6. Pro affordable and compact housing due to schemes like PMAY

    The RBI has used Three-way liquidity measures to increase liquidity in the market.

    1. Reduction of CRR for all banks by 100 basis points. Will release Rs 1,37,000 crore across the banking system.
    2. Accommodation under the Marginal Standing Facility to be increased from 2% from SLR to 3% with immediate effect till June 30. It will release Rs 1.37 lakh crore into the system.
    3. Auction of targeted long-term repo operations of 3-year tenor for total amount Rs 1,00,000 crore at a floating rate. The above measures injected Rs.3.74 Lakh crores in the market.

    The above measure ensures that the demand for the residential compact and affordable segment is high not only during the lockdown but also post lockdown. There will be a surge in demand for such housing.

    We also want the government to look into the following to ensure a conducive environment for the industry to recover.

    1. Extending the EMI moratorium for a further duration of 3-6 months post lockdown also
    2. Not increasing the current low-interest rates of home loans

    As the government has not included NCD in the EMI moratorium the payment of such private placement is continuing without any delay. This ensures that the investment made in such NCD in alternate investments like coliving etc is creating income for the investors. RBI has reduced CRR of all banks. This was not hugely successful as due to lockdown banks are not able to dissipate the funds as loans.

  • Why Real Estate is attractive to invest now?

  • Real estate is one industry that is still yielding benefits to the customer even in this period. The resale of investment is down however the rental returns and yields in commercial are continuing. The surge of industry post lockdown is looking better than other investment products. The investors in mutual funds and equities have lost a huge amount of money during the current period. The major advantage of real estate compared to those in other investments is the availability of a fixed asset.

    Especially if people are investing in alternate investments in real estate like coliving etc there is a better advantage as these are going to surge in the coming future. The capital appreciation in real estate is always more when compared to other investments and return on capital is also quicker compared to other investments.

    Also, this situation has highlighted the deficiencies of equity investments. There are frequent meltdowns like the 2009 financial crisis, the Asian financial crisis in 2015 (mainly in China), the European debt crisis in 2010. These are happening more frequently and impacting the equity markets. This has reduced the appreciation received but also increased the risk of investing.

    Real estate is meanwhile comparatively a reliable and stable investment opportunity. Sometimes the growth might be a bit delayed but the appreciation is always there. Land is a limited resource and demand for it is always increasing.

    Now is the right time to invest in the right product in real estate to get the benefits.

  • The right product to invest

  • Rental properties in real estate are considered as one of the most profitable alternate investment opportunities. One should look carefully before investing and need to identify the asset properly. Looking into the following points carefully before investing will be helpful.

    1. The investor needs to focus on doing the due diligence on the property and focus on developers with a proven track record.
    2. It is good if the property is part of a large venture. This ensures that the project will be appreciated more and can be sold in the future with less difficulty.
    3. The investment amount required for the asset can be small (preferable less than 70-80 lakhs). This ensures that the funds are not committed completely.
    4. The onus is typically on the investor to look for a tenant for his house. If there is an offer for rental from the developer then it is beneficial as it reduces the burden on investors.
    5. It would be preferable to invest in either residential or alternate investments like co-living in the current scenario. They are most likely to be unaffected by the COVID-19 pandemic.
    6. An investor can negotiate with the developer on ready to move in properties for better prices. Alternatively, he can also look for properties that offer a first-mover advantage or income-generating schemes.
    7. Real estate investments produce capital appreciation, along with rental income. Hence investing in real estate will help one to have a solid backup of an asset.

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