Since the first case of COVID-19 was identified in central China in December, it has spread across the world. Such is the scale of the outbreak that the World Health Organization has called COVID-19 a pandemic. At present, the total number of reported cases is, globally, over 1,69,000 and the total number of fatality is over 6,500. After remaining relatively unscathed, India is now witnessing an outbreak of the virus with the number of cases having surged to 114 including the death of two people. The worsening of COVID-19 spread has dealt a bloody blow not only to the financial markets but also to the economic recovery. On 12 March 2020, the Sensex suffered its worst single-day losses. On the economic front, the high hopes of rebound from slowdown is fading and in all likelihood will be delayed by a couple of quarters.
The global GDP may suffer losses of up to 0.2% on account of COVID-19.
The fact that India’s economy is less integrated with China than many of its Asian neighbours, has helped limit the immediate pain. However, the fact remains that China is a vital supplier to large industries such as car manufacturing and pharmaceuticals, and these sectors are starting to feel the pinch. As per Nomura, a financial services group, India sources more than 70% of pharmaceutical ingredients, around a quarter of car parts and the bulk of supplies for electronics from China, and many businesses say supplies are running low.
COVID-19's Realty Check
With the global impact of COVID-19 on multiple sectors, the Indian real estate sector can by no means remain an exception. If not anything else, fear psychosis is gradually gripping the industry. While a few Indian realtors are of the opinion that the impact of COVID-19 on the domestic real estate market will be limited, others reason that there may be fewer residential project launches in the coming months. At the same time, it is also being reasoned that the impact may be restricted to high-end luxury real estate that relies heavily on import of fixtures and furniture from China.
Luxury Real Estate
Though India is not a market for Chinese when it comes to luxury homes, the pandemic is still going to have ripple effects in this segment. Since imports from China have slowed down as a result of the unprecedented situation arising from the Coronavirus pandemic, a sense of uncertainty can be seen looming over the luxury real estate where most of the homes come with interiors and fancy fixtures.
According to Niranjan Hiranandani, president NAREDCO & ASSOCHAM, “Imports from China have slowed down as a result of the unprecedented situation arising from the Coronavirus pandemic. When we look at possession dates as also the ongoing interior work in the luxury real estate segment, these are definitely going to be delayed. Supply of fixtures, furniture and fittings used in luxury housing in India is also imported from China and will be impacted.” To add on the woe, there are no alternative sourcing options for the fixtures, furniture and fittings at the price contracted with Chinese manufacturers. If the pandemic fear continues to persist for a long time, the developers will have to figure out other options while taking the hit on the price differentiation.
India heavily imports articles used in construction activities such as iron and steel products, technical construction equipments, electronic equipment, plastic and fibre elements, solar panels, etc, from China. The heavy reliance on China for steel and steel products is a cause of concern for the real estate industry. With production in China going down, the prices in the allied industries are bound to increase, thereby increasing the costs and reducing the profit margins of real estate developers in India.
The takeaway from the disaster is that India needs to de-risk its supply chains, which is possible with further movement on ease and cost of doing business and continued structural reforms. India needs to move rapidly towards becoming a global manufacturing hub for most items: Chandrajit Banerjee, DG, CII
Commercial Realty
India's commercial real estate market has very limited exposure to mainland China. The market, on the back of a sustained appetite amongst US and EU based corporates for India as an outsourcing destination, till late, has largely remained unaffected. However, the scenario is changing and it is being argued that the demand could get impacted if the US and Indian economies suffer a growth slowdown on account of the COVID-19 spread. According to CBRE the combined share of US and Indian corporates in overall office leasing in 2019 stood at roughly 80%. The disruption to business cycle on account of COVID-19 is expected to result into delayed decision-making, curtailed capital expenditures, thereby slowing down portfolio decisions. However, health and wellness of employees could take centre-stage for majority of the corporates; with greater focus on workplace hygiene, remote working policies and increased adoption of flexible space options.
In 2019, institutional investments from Singapore, Hong Kong and mainland China together alone accounted for 28% of total real estate investment in India. However, such investments are surely going to slow down for next couple of years.
Commercial real estate services organisation Colliers International in its 11 March 2020 report has stated that there should be no significant adverse impact on office absorption in 2020 as pre-commitments should mature this year with the completion of new buildings. After hitting a record of over 60 million sft in 2019, commercial space deals in India was estimated to remain robust in 2020. However, deals or decisions over commercial space take-up could be pushed back, by three to six months or until the pandemic dies down, as key decision makers may not visit India in the backdrop of travel restrictions. The report further states that the occupancy in flexible workspaces will stay muted in March, especially in Delhi-NCR, as several start-ups encourage employees to work from home. During Q2 2019, Colliers anticipate some construction delays, due to supply chain disruptions of imported materials.
“There will be some impact of Coronavirus on commercial leasing for sure. Decisions will get delayed for some time, which means if a company was taking some space in March, they will postpone it for few months to see the impact of disruption due to the virus,” said Anshuman Magazine, chairman for India, South East Asia, Middle East and Africa at CBRE. As per a news report, at least three large deals involving over 500,000 sft each in Bengaluru and Mumbai, which were expected to be concluded by March end, have been deferred as occupiers sought time to assess the impact of the epidemic.
There are players in the industry who opine that at present it is difficult to estimate the impact of the virus and that the industry needs to keep a tab on the overall development. According to Samantak Das, Executive Director and Head of Research, REIS, JLL, it is still premature to assess the current impact. “Given that the real estate sector contributes significantly to India’s economic growth, it is important to broadly analyse how the outbreak will influence this sector and it’s still premature to assess the current impact," he said. Das added that there is already a slump in the hotel and hospitality sector due to the cancellation of flights and closure of borders and that the retail sector too will be challenged due to sourcing disruptions in the apparel, footwear and accessories space. "The slowdown is already being reflected in the delayed decisions by retailers to lease spaces. While the commercial sector has been on a strong foothold, investors and businesses will adopt a wait-and-see approach that we’re witnessing in other global markets,” he remarked.
Time to Brace Up
Nonetheless the real estate industry needs to brace itself. With the threat of infection affecting human lives, the real estate sector can expect a dip in property visits and a reduced buyer interests. However, the world has faced similar outbreaks such as SARS virus, bird flu etc, in the past too and has successfully recovered. Indian real estate and allied manufacturing industries must find positivity in the scenario and benefit by increasing production and indigenous innovation. As the Chinese supply lines are skewed, the industry has an opportunity to explore other markets to procure raw material and decrease dependence on Chinese imports. This could be a blessing in disguise for the indigenous production of imported goods such as metal panels, steel bars, heavy machinery and coke. Further, the solar panel manufacturing companies can also benefit from the reduced supply and increase production to bring down the long-term cost.