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Business Note

Published on: July 27, 2020, 12:08 a.m.
The pandemic-hit real estate sector is passing through a difficult phase
  • Down and out. Photo credit: Sanjay Borade

By Arbind Gupta. Assistant Editor, Business India
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ovid-19 has started showing its adverse impact on the domestic real estate sector. The commercial office space across the top eight cities during the first half of the current calendar year (H1 2020) has witnessed a historic decline in terms of both transactions and new completions. In H1 2020, office transactions have declined by 37 per cent YoY to 17.2 million sq ft, the lowest in the last 10 years, while new completions were down 27 per cent to 17.3 million sq ft, says a Knight Frank India report.

Despite the low volume of transaction and supply, the weighted average rental (office space) for the eight cities reported a growth of 4 per cent YoY in H1 2020 to Rs83 per sq ft a month. Information Technology (IT) dominated the market with 43 per cent of the overall sector-wise transactions.

After two years of steady demand, sales of residential stocks during H1 2020 in these top eight cities dipped by a significant 54 per cent to a decade low of 59,538 units, with sales mostly coming from the first quarter of the calendar year. About 47 per cent of sales were in residential properties below Rs50 lakh ticket size. As per the report, new home launches also reported a massive drop of 46 per cent to 60,489 units. The unprecedented disruptions caused by the ongoing pandemic stalled the economy in Q2 2020 and the lockdown resulted in a complete shutdown of all activities in the real estate industry, causing a massive fall of 84 per cent (YoY) in sales to 9,632 units in Q2 2020. As against this, home sales of 49,905 units were reported in Q1 2020. Number of new home launches recorded in Q1 2020 was 54,905 units, whereas, the number saw a sharp drop to 5,584 units in Q2 2020.

“The residential real estate sector which was already going through a rough patch has got severely hit by the current crisis. With income uncertainty for future, demand for housing will take a hit. While the RBI has announced the much required liquidity injecting measures and cut in policy interest rate, there is an urgent need for the government to come up with some demand boosting measures for the real estate sector,” says Shishir Baijal, chairman and managing director, Knight Frank India.

“As the second moratorium period ends in August, we hope that the government will make positive interventions such as one-time restructuring of loans for developers as well as extension of moratorium for retail loans (at least for home loans) to ensure liquidity and low default,” adds Baijal.

In the commercial office space, office supply came to a near standstill in Q2 2020 (April- June) with project completions declining 79 per cent YoY. In H1 2020, Mumbai and Chennai markets saw the most supply, accounting for 40 per cent of the total 17.3 million sq ft delivered during the period. The sharpest fall in supply was seen in the NCR and Pune markets, at 86 per cent and 87 per cent, respectively.

Sharp fall

Office leasing activity during Q2 2020 bore the brunt of the pandemic, and transaction activities fell 79 per cent. All major markets were impacted adversely: Pune was down 47 per cent YoY; NCR (45 per cent), Bengaluru (42 per cent) and Hyderabad (43 per cent). With two large ticket size deals comprising 1.8 million sq ft, Mumbai was relatively less impacted and reported 17 per cent de-growth in H1 2020. The sharper fall in transactions compared to new completions translated into a significant increase in vacancy level to 14.1 per cent in H1 2020, from 12.7 per cent in H1 2019, says the Knight Frank India report.

“With economic uncertainties creating significant headwinds, we expect the office space take up to remain cautious. Most occupiers are expected to hesitate in committing to expansion in the current market scenario and may delay their leasing decisions for later. Occupiers are also devising the best formula for office occupancy for their near-term future to accommodate the impact of Covid-19 and lockdown such as social distancing, restriction in movement, etc. For the office market, it will be a wait and watch till a more permanent solution to this pandemic is found,” says Baijal.

Despite the low volume of transaction, the weighted average rental for the eight cities during H1 2020 reported a growth of 4 per cent, primarily attributed to a 5.6 per cent per cent rental growth in Bengaluru, which also experienced the most transaction activities during the period. The sharpest fall in office rental was seen in NCR (8.8 per cent ) and Ahmedabad (12.1 per cent).

The sectoral share of office transactions remained comparatively intact with IT dominating 43 per cent of overall transactions, followed by BFSI at 16 per cent. Two sectors, co-working and other services managed a share of 14 per cent each, while manufacturing had a pie of 16 per cent.

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