Effect of COVID-19 second wave on the real estate sector!

The resurgence of COVID-19 cases in India and the looming threat of another wave pose a significant challenge to the real estate sector's recovery witnessed over the past six months. Additionally, the Maharashtra government's decision against extending the reduced stamp duty exemption could dampen the enthusiasm of potential homebuyers and investors.

The unprecedented obstacles presented by this renewed surge in infections are also disrupting expansion strategies for businesses, leading them to defer decisions on office rentals. Consequently, the second wave has introduced considerable turbulence within the commercial real estate (CRE) sector.

The expiration of the stamp duty exemption, coupled with the imposition of curfews and lockdowns due to the second wave, presents a dual threat to home sales figures. Construction activities have experienced interruptions, and there has been a marked decline in on-site customer visits for project finalization.

JLL India Report

JLL India's Q1 2021 office report states, “The momentum of leasing in the coming quarters will largely depend on how long it takes to end the second wave of Covid cases.” Samantak Das, Head of Research at JLL India, observed that growing anxieties surrounding the escalating COVID-19 case numbers in the latter half of March have prompted prospective homebuyers to once again postpone their purchase decisions.

Impact on Commercial Real Estate

The second wave of the pandemic has significantly impacted the commercial real estate sector. Government measures such as curfew impositions and overnight closures are anticipated to disrupt supply chains. A report by India Ratings and Research (Ind-Ra) suggests that COVID-19 poses a moderate challenge to supply chains across various real estate segments.

This impact is evident in the rising vacancy rates for Class A office spaces, which have increased for five consecutive quarters. The vacancy rate climbed from 12.8% in March 2020 to approximately 14.8% by March 14, 2021.

Net absorption in the office space market experienced a 37% decline in Q1 2021, reaching 5.52 million square feet (MSF). Net leasing, or rent, also contracted by 33% from 8.34 MSF in Q4 2020. Only Bangalore and Delhi NCR observed an increase in net absorption during Q1 2021 compared to Q4 2020.

Despite the emergence of remote work trends, financially stable tenants occupying Class A office spaces have generally honored their existing lease agreements and obligations according to analyses. As the vaccination campaign progresses and occupants maintain a cautious optimism, 2021 projects around 38 MSF of new completions. Net absorption is anticipated to reach approximately 30 MSF, with a potential downward trend. This projection aligns with the average annual net absorption observed between 2016 and 2018.

Impact on Residential Real Estate

A recent analysis by CARE Ratings indicates that the second wave may obstruct the recovery experienced by the residential sector over the past six months.

Demand for affordable and mid-segment housing is expected to recover more rapidly, supported by government-subsidized initiatives. The government has extended the exemptions and advantages for purchasing affordable housing by an additional year, until March 31, 2022. Demand in smaller cities is projected to be stronger, as the work-from-home dynamic has motivated many to purchase properties in their hometowns. In 2021, it is anticipated that housing demand will reach its 2019 levels, but only if this second wave remains short-lived. An extended second wave stands to impact employment and subsequently have repercussions across the residential sector.

Expert Opinions

Dr. Niranjan Hiranandani, Managing Director of Hiranandani Group, stated, "Study and work from home is certainly to stay longer, so some families may find it wise to move into a larger home with flexi-interiors. The exemption in the stamp duty rate has certainly played a vital role in improving sales. However, it is not the only positive factor affecting sales until September 2020 and before the end of the scheme. Other factors are still present, for example, home loan rates are at historically low levels; property developers are offering great deals. These factors also play an important role in positively impacting homebuyers’ confidence."

Anil Pharande, Chairman of Pharande Spaces, commented, "Real estate will definitely be impacted as the number of site visits will decrease. On the other hand, people during this pandemic are more eager to own their homes. As a result, online property queries or searches are rising. Developers will easily close the sale as soon as the situation stabilizes. There will be a 10-15% drop in sales, but it will even out again. Property prices are at an all-time lower level in 10 years, and interest rates on home loans are also attractive. Further, developers will continue to make adjustments to meet this demand."

Anuj Puri, Chairman of Anarock Property Consultants, noted, "incentives such as a reduction in stamp duty are for a limited period. And the state’s lowest and best home loan rates (6.70%) have not been continued beyond 31 March 2021. In general, these factors, together with the partial lockdown will affect the total home sales in the future."