Indian real estate finds its footing again, slow step but steady pace

The year 2020 was one that rode on the tailwinds of 2019, but that soon became a distant memory as the COVID-19 pandemic became the defining moment just when we were ushering in a brand-new decade. Enough has been said about that annus horribilis. The year 2021 started out on a slightly optimistic note as economic activity saw a calibrated re-opening and all signs pointed to a better than expected rebound. The second wave may have mirrored the first COVID lockdowns in terms of the timing, but it cut a devastating swathe across the country and upended economic recovery parameters. However, our resilience and learnings from the first encounter with this ‘novel virus’ helped.

The Indian real estate story in 2021 has so far been a narrative with dual strands - that of optimism interspersed with periods of inaction. While occupiers of commercial office space were cautiously optimistic in the first quarter of 2021, they went into a wait-and-watch mode when the second wave of the virus hit us in the second quarter. From the knee-jerk reaction of all real estate players who put their plans and projects on hold during the first COVID wave, to re-creating their business continuity plans and building a pandemic preparedness strategy, it has certainly been a steep learning curve.

Office space 2021: (Finally) Prepared for a pandemic

In 2021, office occupiers were much better prepared, quickly pivoting to provide healthcare and medical support to employees and implementing their vaccine strategy. While net absorption in the second quarter dropped by 25% q-o-q, given the regional restrictions for a significant part of this period, it compared favourably to the 61% q-o-q drop seen in Q2 2020. In a sign of occupiers’ agility and readiness to deal with pandemic-induced challenges, select office markets, especially tech-driven ones, showed signs of market activity returning. RFPs which had temporarily been put on hold, became active again and on-hold deals were closed even as older pre-commitments remained largely intact. In fact, corporate downsizing as part of cost optimization was also much lower in H1 2021 over 2020.

Pan India vacancy levels rose, as developers were better prepared to manage on-site labour and material supply chains. This resulted in H1 2021 witnessing higher completions on a y-o-y basis. We also noted a ‘flight to quality’ as occupiers chased WELL-ness and LEED certifications as part of their ESG goals, ensuring that institutionally-held, superior grade office projects retained their occupier base.

Given the rising vaccination levels with corporates ensuring vaccination for their employees on a war footing, market activity will pick up sooner than earlier expected. We expect 2021 to end with net absorption levels remaining largely stable over last year and office space supply remaining close to its 5-year average (~37 million sq ft), with market activity gradually gaining momentum.

Home ownership on the rise

India’s housing sector has found a renewed sense of purpose during the current global crisis. The pandemic has brought into focus the need for home ownership with safety, security, health and wellness on high priority. Given the enforced period of work from home and an evolving hybrid work culture, a push for flexible configurations along affordable neighborhoods has increased the demand for bigger homes.

The affordable buoyancy, stagnancy in primary market rates and state-level incentives has created a sustainable buying environment. With the job market showing signs of recovery, particularly in the services sector and economic security creeping back, India’s housing sector is primed for a robust recovery period. In fact, residential project launches in H1 2021 were up by 10%, while sales were up by 18% over last fiscal. Despite a sluggish Q2 2021, when sales and launches fell amid lockdown restrictions, the period compares very favorably with the market scenario last year.

Mid and affordable housing segments continue to dominate new project launches. We also expect bigger home configurations to be in focus as developers look to match the demands of a changed market. Overall, the housing market remains primed for a strong performance over H2 2021 with buying momentum remaining intact. The upcoming festive season and spate of developer incentives are expected to keep pricing fundamentals steady and attract home buyers to the market.

Investment trends remain robust

The real estate investment landscape remains the most up to date as it closely monitors market trends. The gradual easing of lockdown restrictions by Q1 2021, provided first-hand experience of the post-pandemic world to investors and led to re-rating of risks with asset allocation witnessing a change in Q2 2021. In fact, Q2 2021 recorded the highest second-quarter institutional flow of funds to the sector in the last five years with USD 1.36 billion

The shift in investment strategy from specific assets to platform type investments with marquee developers has led to a shift from asset and region to a purely asset portfolio, signifying the shift in investment philosophies and long-term view of investors in Indian real estate. Interestingly, there are defensive as well as contrarian investment strategies at play in the current market dynamics. The continued growth drivers of the warehousing segment are noteworthy and at the same time, the digital push in the Indian economy is creating a very fertile ground for investments in the data centre space.

The creation of retail platforms in Q2 2021 also signifies the impending recovery of ‘brick and mortar’ retail spaces. Offices remain a key part of the investment portfolio for global funds and the successful listing of the two latest REITs in their IPOs indicate the long-term fundamentals and resilience of the commercial sector. With H1 2021 already witnessing more than half of the investment flows seen in 2020, along with big deals lined up ahead and new funds exploring market opportunities, we expect realty investments in India to remain on a strong footing. Moving ahead, contrarian picks in retail and hospitality will ensure bigger value accretion in portfolio and data centres as investments in emerging asset classes will be the cornerstones. ?

Future forward with data centre growth

A quick word on the strong momentum in the data centre space in India is warranted as the country is primed to double its existing data centre capacity by 2023. This translates into an additional data centre space development potential of 6 million sq ft over this period. Investment commitments by global investors and data centre players to the tune of USD 3 billion highlight the growth potential in this segment. The imminent rollout of 5G, which will cause a sharp spike in data usage and growth of hyperscalers-which are already fueling large land acquisitions and investments by operators—will be key growth drivers for tomorrow. The rise in cloud adoption, given the increase in digital traffic from a distributed workforce, data security needs and business disruption, are other strong factors behind the meteoric rise of data centres in recent times.

We look forward in anticipation to the years ahead.

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