The real estate sector may be amongst the last to recover from the current COVID-19 pandemic crisis. The adverse impact of lockdown is not just visible on demand across real estate segments, but also on Private Equity (PE) investments
For investors in residential segments
In H1 2020, the all-India residential sales declined by 54%. With sales expected to slow down further on account of job losses, pay cuts and banks going slow on new home loan disbursals, cash flows of several developers will get stretched, jeopardising the completion of projects. The residential sector has already been capital starved for almost 2 years since the IL&FS debacle in September 2018
With this backdrop, residential developers are likely to go slow on new project launches shrinking the investment universe, though there will be ample opportunities emerging for investors in the last mile funding space. While the Government has implemented an INR 250 billion stressed asset fund through SBI-Caps to provide last mile funding for residential projects, this will not be sufficient as the requirement for such funds is expected to jump significantly. This is where private equity money can come in and make healthy return
PE investors coming in with last mile funds would have to keep the covenants strong to ensure timely completion of the project and should have the patience to wait till the economy recuperates before exiting. While the projects backed by Government funds enjoy several concessions, a similar fund by PE will not get such benefits
For investors in office segments
On account of the strong fundamentals of the India office markets, the office segment had witnessed PE investments of over USD 13.6 billion in the previous decade with over USD 9.3 billion of that coming in the last 3 years. 2019 was a landmark year for office leasing with transaction activity touching a historic high of 60.6 mn sq ft (5.62 mn sq m). The Indian office market is on a strong footing on account of the vast availability of STEM talent, a robust IT industry, recent dollar depreciation, attractive destination for BFSI offshoring activities, low vacancy levels in Grade A space, cost arbitrage, expansion plans of existing occupiers and a strong demand from occupiers for under-construction spaces. However, investors today would have to adopt an entirely different approach to evaluation
The all-India office leasing activity has declined by 37% YoY in H1 2020. Most occupiers have put their expansion plans on hold and a few are also giving up existing spaces to cut costs. In 2020, there will be huge pressure on companies to cut costs and real estate sector would also bear the brunt of the cost cutting exercise
The strong rental growth witnessed in the past few years is likely to stall in near term and may also decline in certain business districts in 2020. Further, the element of work-from-home (WFH) will influence office leasing in the short term. While WFH is not a threat to long term fundamentals of office demand, it would pose a challenge until the pandemic exists
https://content.knightfrank.com/research/2028/documents/en/india-real-estate-residential-office-h1-2020-indian-real-estate-residential-office-7302.pdf
