These past years the real estate industry of India has been grappling with project delays, reducing buyer confidence, issues of GST and RERA coming in through legislation adding to complexities and a hesitant investor. The covid crisis has only made it worse.
While the government has eased restrictions for this sector, several experts feel the situation might worsen. Massive disruptions are predicted in the supply chain, leading to disturbances and delay in construction activity.
In an exclusive fireside webinar organized by The Blue Circle on ‘Future of Real Estate’, Sanjay Dutt, MD & CEO, Tata Realty & Infrastructure and Pavan Choudary, Author, CEO and Public Intellectual, discussed the challenges grappling the real estate industry and the future outlook.
Surge in commercial real estate
While the residential segment has dominated the headlines for the last few years, it is the office space that is ‘reality of realty’. Elaborating Sanjay said, “The office segment commands an incremental demand of approx 50 million square feet per annum which includes approx 10-15 million sq feet from warehousing and logistic, 5-10 million sq feet from shopping centres and the rest from co-working, co-living, and student housing.”
As per JLL data, commercial real estate in key office markets has set a new benchmark in net absorption and completions. While 46.5 million sq ft offices were absorbed, nearly 52 million sq ft grade A offices were completed in 2019. A significant growth was recorded in the second half, with net absorption increasing 63% to 24.7 million sq ft.
Demand growth in 2019 was driven by strong expansion of IT/ITeS, which accounted for 42% of total leasing and co-working operators with 14%.
Contrary to general perception that the sector is going through headwinds, the office segment is going from strength to strength.
Riding on the support of government initiatives such as Pradhan Mantri Awas Yojana (PMAY) and Housing for All by 2022, the affordable housing segment recorded a growth of 27% post 2016, but this might change due to the COVID-19 woes.
Covid-19 and the ensuing lockdown broke the back of developers who were already over-leveraged with legacy projects and sector-focused residential projects in NCR and Mumbai.
Boom and bust
Prior to RERA, the real estate market was largely unregulated, witnessing several cycles of boom and bust that led to large-scale entry and exit of developers.
Through these cycles, the developers remained largely optimistic, hoping for the markets to change and demand to increase.
On the other hand, analysts would jump to conclusions, every time a new event took over the world. Sanjay shared examples of the global financial crisis, advent of AI as well as cost arbitrage, wherein analysts were quick to say ‘real estate will crash’.
Besides, developers always followed herd mentality – about a decade ago, their focus was commercial real estate, and then there was a sudden switch to residential due to high cash flows.
“In many cities, the residential prices appreciated, commercial real estate prices did not. This led to mass exodus of developers to residential, particularly in Mumbai, and gradually in prime locations of Delhi and Bangalore.”
Adding to his previous point, he said that research companies didn’t do ‘proper homework’, because of which developers were deprived of proper insights and research that could have helped them make informed decisions.
“Research companies would count every launch as inventory, giving the wrong impression to the market. New launches would take 3 to 4 years to complete, yet those too were added.”
Before the Lehman Brothers crisis in 2008, many developers wanted to spread pan-India and become big overnight. There was an element of greed.
“Developers wanted to go for scale, they wanted to run even before they started walking,” added Pavan.
Several of them, in consultation with global companies, also expanded overseas to Dubai, Malaysia and even the US, and spread themselves too thin. And then post the crisis, when they came back to the home market, they had to buy land, which is one of the most expensive in the world,” explained Sanjay.
“Land and enterprise valuations went up and developers went for higher valuations to attract higher equity. Over 27 billion dollars got raised for India. The only way developers could justify increasing the price was by doing luxury projects. They started in the affordable segment but now moved to luxury. The best architects were hired, the best specs were created. Developers loved meeting creative architects and loved foreign trips. They went for big brands – Philippe Starck, Trump Tower, RSP of Singapore. They overspent. Rest is history. All expenses, costs were in double digits. Only thing that became single digit was equity.”
Post-liberalisation of FDI in the construction sector in 2005, banks were not permitted to fund because of over speculation in real estate, leading to entry for NBFCs. “The actual purpose of the government was defeated.”
“I saw lenders too getting greedy, the banks and NBFCs were making equity returns in debt instruments.The stress that came because of the regulatory changes fuelled by the greed of NBFCs snowballed into a big issue,” lamented Sanjay.
Time for consolidation
Market players may go through another phase of consolidation in the coming months as the coronavirus pandemic subsides.
Developers who were there in the pre-RERA phase realised that the post-RERA regime is not matching with their risk appetite.
The sector witnessed massive shake-ups – mergers, amalgamations and exits by several developers – post the implementation of the Real Estate (Regulation and Development) Act, 2016.
“Risk appetite has to be high and you have to be a very disciplined organisation to mitigate risks,” said Sanjay.
Agility – mantra for success
Adding to his previous point, Sanjay shared that several other factors will come into play post-Covid – the need to be agile and lean, institutionalising the organisation, more western style management and greater adoption of technology.
Echoing Sanjay, Pavan said that since we are still in a flux, agility is going to be an important value as we move across ‘shifting sands’.
“Form of buildings has not only followed function, it has also followed infection. According to the Dodgy Miasma theory, diseases were caused by the toxic vapours of the soil, which led to millions of pavements being lined and cemented with flagstones leading to this sector’s growth. In the same way, there are going to be similar changes that will come because of the pandemic. Builders that are agile and perceptive, and are looking at the changing socio-economic grain will sustain.”
Change in design
Just as terrorism led to higher security standards in residential and commercial complexes, similarly the covid-19 pandemic is likely to leave an imprint on how developers build, design and manage the ecosystem.
Sanjay expects a permanent impact on the design and privacy of homes, especially with regard to giving an office environment within the comfort of residences.
While leading developers like Tata Realty & Infrastructure are already using technology in several ways, whether for security, club access, construction, management or lead generation, currently, their focus is on providing a life-like virtual tour of the property.
“We are working on that. As of now, we are giving legal possessions by email and delivering keys to buyers. Whenever they want to come post lockdown, they can come and take a copy of their physical possessions. Email is considered a legitimate form of communication today by court,” added Sanjay.
“Several buyers have bought high-end properties without even visiting the physical flats, because of trust in the legacy of the Tata brand. Going forward, trust in a brand will matter even more.”
On a positive note
As per statistics, for every 100 square feet of space that a company leases, there arises a need for 1,000 square feet of residential space. Because of Covid, it will be even more in the next two years.
Sanjay is optimistic. “Gradually, the market will recover. I believe offices in 2023 will be back to 30-35 million sq feet.”
“This is a good time to buy property. You have a ready inventory with no GST and substantially lower costs. Maharashtra has already reduced circle rates.”
While signing off, Sanjay had a request for the government. While he appreciates the steps taken by the central government in bringing about regulations to make the real estate sector more transparent, it is equally critical to bring ‘state government departments under the ambit of RERA’. The agility seen at the centre has yet to percolate to the states.