Decoding real estate in post Covid-19 era
Long ago, Franklin D. Roosevelt said that “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
This understanding has actually stood the test of time with real estate property launches, prices and valuations growing year after year. But the sector does have its downtime at intervals. In the current scenario, we have already witnessed depreciation in the real estate prices along with an increase in unsold inventory over the recent past.
This isn’t the Covid-2019 impact alone but a collective slowdown that the economy has been facing along with the excessive premiums that real estate sector had gained in the good times, which are now seemingly normalizing. But what’s in store for the realty out there?
Many have been contemplating that the real estate market is set for an elongated lull for another 2-3 years. But on the flip side there are few real estate companies and investors who think otherwise.
As per a report by Bloomberg, in H1 of CY20, the global real estate investments have declined by ~33% and that in Asia has been hit the worst with a fall of ~45%, on YoY basis. With regards to the domestic market, a report by Knight Frank indicated that the sales of residential property in eight major metros of India declined by ~54% YoY in H1CY20 to a decadal low of 59,538 units as compared to 129,285 units in a year ago period with new launches dropping by about 46% to 60,489 units.
In several cities the builders have been rigid on the property prices and refused to reduce them. However, it has been noticed that a direct one-to-one negotiation has resulted in close to +20% discounts so as to reduce the already piled up unsold inventory.
While the denial mode of builders so far has made the crisis more prominent with vast decline in sales; they remain hopeful of a demand recovery as the economy starts to get back on track. In the hindsight though, with reduced disposable incomes, large scale job losses and savings gaining higher importance than ever before, the residential real estate markets may only come to limelight post a couple of years.
Why only residential buying, the work spaces have gone home too. The supply of office space declined 27% during the H1CY20 along with a steep decline of37% in transactions, the lowest level in a decade. With regards to the newly emerged concept of Work-From-Home during the lockdown, there are several ifs and buts about the feasibility of the concept and their impact on the Profit and Loss Statements of organizations.
It cannot be denied that many corporates may consider adopting this concept especially in sectors which do not have any major cyber security threat. However, this is debatable as some of this lost demand may be covered-up by those willing to space out their offices so as to make them more ‘social-distancing-friendly’. Several are of an opinion that the commercial real estate space being least affected so far, has the potential to bounce back much sooner.
The sector has been witnessing a slowdown for nearly half a decade now with the Covid-2019 impact making it even worse and seemingly it may go through some more years of sleep time before it rises back to witness the light of the day. Albeit, commercial real estate may be the early riser as compared to the residential segment. The recovery is likely to be followed by retail spaces and then by residential and hospitality.
Amidst all the crisis, the government reviewing its FDI policy for a 100% investment in real estate certainly presents a ray of hope. Companies with a good product mix of commercial, retail and residential properties would be the first to start gaining as the economy and realty markets recover, while for others the sunshine may be a bit delayed.
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