Real estate has a healthy demand outlook, but some hiccups remain

The second wave may affect Q1, but there is a strong expectation that FY22 demand will perhaps equal or surpass FY20 levels

In the last few years, the real estate sector has battled a number of headwinds from disruptive policy reforms (though good for the long term), margin compression, tight liquidity, and Covid-19. This has caused a massive consolidation, driving many developers out of business, while rewarding the survivors with higher market share. Accompanied by tight availability of credit in the sector, this consolidation will also help keep the oversupply risk in check in the coming years.
 
The sector is made up of several property types, each with a distinct market cycle, challenges, and opportunities. Covid-19 has caused short-to-medium-term demand disruption in some sub-sectors, while accelerating demand in others.
 
Covid caused a year-on-year drop in office absorption in major cities from 47 million square feet to 26 million sq ft in 2020 (source: JLL Research). The second wave of Covid-19 will keep the tenants occupied with resuming operations in existing offices, delaying attention to new office requirements. Though the outlook for office demand in financial year 2021-22 (FY22) will now depend on when offices are allowed to resume, the expectation is that demand will grow in FY22 over FY21. The long-term outlook also for office demand from offshoring remains robust, given India’s unmatched cost competitiveness, good quality talent, and improving ease of doing business. The potential demand compression from likely increased work from home (WFH) will be offset by increased demand from de-densification of offices, keeping demand robust. Given these, the new supply outlook for the next few years seems generally benign (albeit, with chances of a mild excess supply in FY22), which makes the Covid crisis very different from the global financial crisis (GFC), which left the office market in major oversupply.
 
As the lockdown eased last year, demand for apartments surged across all major urban markets in H2FY21, raising expectations that a cyclical demand recovery, which has eluded for the last 6 years, is around the corner. Indeed, the ingredients for the recovery recipe are undeniably present — affordability is the highest in two decades, mortgage interest rates are the lowest ever, and office market absorption, a leading indicator of urban job creation, has been robust since 2015 (with the exception of 2020). The second wave of Covid may cause a hiccup, affecting Q1 market volume, but there is a strong expectation that FY22 demand will perhaps equal or surpass FY20 levels, setting the stage for a cyclical recovery.

 
Retail, entertainment and hospitality sub-sectors have been the worst hit. The real recovery trajectory of these will closely follow vaccination in major cities, which will likely take through 2021, based on current expectation. Thus, these sub-sectors may continue to struggle through FY22, though to a lesser extent than in FY21.
 
Digital real estate sub-sectors, specifically warehousing and data centres, will thrive in FY22. Covid-19 has accelerated digital transformation of business and commerce. The need for computation, storage, and transmission of data is seeing explosive growth, and will drive multi-fold growth in demand for data centres. There will be further push to demand for data centres as and when the government moves to make data localisation mandatory. The demand for warehouses will also continue to be robust, benefitting from the thrust on e-commerce sector because of Covid-19, and the recent emphasis by the government on manufacturing sector.
 
 
The author is a partner with Actis. The views are personal