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Exclusive Interview with Business Standard: Impact of the second wave of Covid-19 across real estate asset classes

Anshul Jain • 02/08/2021
The second wave of the pandemic has had a diverse impact on different segments of the real estate sector in the first half of the calendar year 2021. While the residential segment has seen growth, office properties have seen a hit. Segments such as warehousing, data centres and others have seen good traction. Read this exclusive interview of Anshul Jain, Managing Director India and South East Asia, Cushman & Wakefield with Raghavendra Kamath of Business Standard, as he talks about the impact of the second wave of Covid-19 across real estate asset classes. 

How have residential sales in India behaved vis-a- vis other countries in the Asia Pacific region? 
Residential launches and sales have picked up sharply in H1 2021 as compared to the same period last year, though the second Covid wave stalled the momentum somewhat in the second quarter this year. Residential prices though have witnessed some correction and they are likely to remain in that range at least in the near-term. Developers continue to offer incentives to attract homebuyers that includes selective price discounts, price protection, free furniture, EMI holidays, easy cancellations / refunds etc. Sustained low borrowing rates will provide an added boost to housing demand.  

Residential sector in APAC markets such as Singapore remains resilient with higher sales recorded in 2020 despite the impact of Covid-19. This was primarily due to good demand for smaller and affordable units and low interest rates. With Singapore relatively successful in controlling the pandemic, developers moved ahead with new projects, and prices have started to recover. House prices have started to rise in Sydney as well with low unemployment, mortgage rates and higher consumer confidence. On the other hand, Jakarta has reported declining home sales in Q1 2021 with a significant number of cancelled transactions. Supply remains low and house price growth has been marginal with the market yet to recover. 

Why do you think the uptick in higher priced homes is higher than lower priced homes in recent months?  
There are a multitude of factors contributing to this phenomenon. On the customer side, the pandemic ensured that people spent an unprecedented amount of time in their homes, as families. The expectation from home as a space underwent a significant change. Larger houses, study areas, gardening spaces are some of the aspects that have emerged as new needs, post pandemic. This clubbed with low interest rates, market rates still lower than the old highs and customer preference for superior quality construction with better amenities, are all contributing towards the premium homes segment seeing greater traction. When we look at the developer side, we see market consolidation, rising dominance of the credible real estate players, with clean and trustworthy track records as some of the key reasons for which the client today is willing to pay a premium. 

Since vacancies are rising and yields are falling, do you expect new REIT listings will come to a halt for some time in India?  
Covid-19 has had an adverse near-term impact on the Indian office market but the medium to long term outlook remains strong. Vacancies have risen in some projects largely due to scheduled exits while a marginal drop in yield masks the fact that Indian office assets still provide substantially higher yields than those in the US or other developed APAC markets. As such, REIT-able assets and new REITs are unlikely to be seriously impacted and we could see several new listings over the next 12-24 months in line with recovery in the office market.  

The pandemic period has seen two REIT listings (Mindspace Business Parks and Brookfield) signifying the confidence in rent yielding office assets. These are Grade A assets with marquee tenant rosters and extremely tight vacancies. Relatively higher yields in a low interest rate environment globally will continue to drive foreign investments into India and continue to facilitate development of the REIT market. Recent government initiatives such as allowing higher debt financing and tax benefits on dividends will improve the REIT outlook further.  

What is your outlook for office leasing in H2 of this year as office leasing has seen a drop in Q2FY21? 
Gross leasing fell by 16.9 per cent on a q-o-q basis in the Top 8 cities, although rentals remained largely stable and pre-leasing of under-construction properties witnessed a surge in cities such as Hyderabad and Chennai as large occupiers signed deals for bigger spaces in keeping with long term expansion plans. The biggest factor that is going to infuse optimism is the vaccination drive that is set to pick up pace over the next 2-3 months. The announcement of free vaccines by the government as well as regular inoculation drives organized by various private organizations in partnership with hospitals is gradually bringing back normalcy among developers and occupiers. Large occupiers will continue to take advantage of market conditions and sew up large space deals, as is already happening. Flex / managed spaces will be in demand due to the cost optimization and for the flexibility they provide. Having said that, office vacancies will rise in the interim owing to some new supply hitting the market in the second half of the year, and an expected tepid absorption of space. However, the country’s cost-plus value proposition (large talent pool, competitive salaries and affordable office rentals) will continue to attract global multinationals to set up operations and boost tech outsourcing further, thereby keeping the fundamental market drivers intact.  

Do you think malls will recover their business soon in India given the threat of a third wave of pandemic here? 
Shopping malls are likely to benefit from improvement in consumer demand as vaccination picks up pace, the employment scenario strengthens, and consumers witness an improvement in purchasing power gradually. Footfalls at malls are likely to increase with landlords and tenants implementing health and safety protocols and ensuring social distancing. Moreover, mall tenants will continue to be supported through revenue share arrangements (with lower minimum guarantee) and selective rental discounts until there is sustainable business recovery. Both mall developers and tenants faced a sharp decline in revenues last year, but they are expected to witness healthier revenue growth not just due to the low base but also because of lower economic impact of the second wave and better consumer demand. Vacancies in Grade A malls will continue to remain in low single digits on the back of strong demand for quality retail space.  

The third wave, if there is one, is likely to have a mild impact on the real estate sector and the broader economy provided vaccinations are expedited and healthcare infrastructure is ramped up in the next 2-3 months. COVID-19 guidelines, including social distancing and hygiene norms, would have to be strictly followed even after vaccination. The impact on upcoming mall projects is likely to be moderate given that developers have been vaccinating their workers. 

What are some of the big changes you have seen in Indian real estate during the pandemic? 

The Indian real estate due to the Covid-19 pandemic has seen a rise in the focus on industrial and logistics and data centres. It is now acknowledged that these asset classes are likely to drive growth in the real estate sector over the medium to long term and they are increasingly attracting long term institutional capital from large, global players. Industrial segment (warehousing/ logistics) is benefiting from the growth in e-commerce, robust demand from third party logistics (3PL) operators and government focus on manufacturing. Government policies such as production linked incentives (PLI) for sectors such as electronics, IT hardware, telecom equipment, pharma and development of integrated logistics hubs are likely to drive demand for Grade A warehouses. Cold storage units are also emerging as a high growth asset class given inadequate capacity and demand from agricultural and pharmaceutical sectors. Large global players such as Blackstone, Ascendas and ESR have already committed substantial investments in warehousing through both M&As and greenfield developments.  

On the Office front, the pandemic has acted as an accelerator for many facets of real estate that were brewing- consolidation in the industry, preference for Grade A built environment, focus on employee wellbeing, adoption of technology and demand for meeting ESG standards. I believe some of the changes will be short lived while some are going to become part of the post pandemic world for keeps. Social distancing, work-from-home to my mind fall in the first bucket. They are around till the majority are vaccinated and we feel safe enough to come back and reclaim our normal. We are seeing this play out in many countries that have so far contained the spread, in the last 6-8 months. 


This article originally appeared in Business Standard on Sun, July 25 2021.