Does India’s real estate sector need to be rebuilt?

When the kitchen becomes your cafeteria, the balcony your smoke-break adda and the coffee table your workstation, the line between a home and an office ceases to exist. As the lockdown extends every month, for many office-goers, waking up with disheveled hair and logging in for work from the bed has become the new routine. And, this dreary lifestyle is also reflecting on India’s real estate sector.

According to new research done by Knight Frank in NCR, Mumbai, Bengaluru, Hyderabad, Kolkata, Ahmedabad, Pune and Chennai, transactions in office market have dropped 37% YoY, from 27.4 million sq ft to 17.2 million sq ft between January and June 2020. New project completions in this market have also dropped 27%, from 23.9 million sq ft to 17.3 million sq ft, in the same period. Additionally, due to revenue disruption caused by the pandemic, 6.3 million sq ft of office space was handed back to landlords with Bengaluru accounting for almost 56% of that. Meanwhile, Kolkata and Ahmedabad saw vacancy levels jump the most, by 9% and 8% YoY, respectively to 41% and 42% by the end of June. This headwind has resulted in some corporates re-exploring their office space requirements forever, states the report.

However, the office market, which had been the best performing real estate segment over the past few years, is not the only one to take the hit. Housing sales, too, have fallen by a massive 54%, from 129,285 units to a decadal low of 59,538 units in the first half of the year as NCR, Chennai and Hyderabad recorded near zero sales during the lockdown. New launches in the residential segment also declined 46%, from 111,175 units to 60,489 units, in the top eight cities. While Mumbai led in terms of share of launches and sales in H1 2020 at 39% and 31%, respectively, it also took the top spot for unsold inventory with 150,154 housing units.

But, this collapse cannot be completely blamed on the pandemic. As per the report, Indian real estate sector was already on rickety grounds as RBI’s norms for lending to builders and developers kept getting stricter over the past few years. RERA’s restrictions on customer advances also added to the woes. This was followed by the NBFC crisis at the end of 2018 due to which investor demand reduced dramatically and prices stagnated. COVID-19 was only the final nail in the coffin.

With labourers migrating back to the villages, project cycles getting extended and developer profitability taking a hit, the pricing environment has now weakened. Developers are either offering a price discount through “lockdown offers” and “COVID sale” or some form of a financial scheme to prospective home buyers. The weighted average price of residential units have fallen across most cities with NCR, Pune and Chennai seeing the most correction at 5.8%, 5.4% and 5.5%, respectively YoY in H1 2020. Moreover, 58% of the units launched between January and June were priced under Rs.5 million compared to 51% in H1 2019. As per the report, this fall in prices is accompanied by reduction in average unit sizes of new launches that are more in-line with the contemporary homebuyer’s needs.