Analysts turn cautious on real estate stocks amid rising Covid cases

The onset of the second wave of Covid and the ensuing curbs across key economic hubs has had another casualty – the commercial real estate segment. Experts say there is still uncertainty in the realty market with respect to resumption of business as usual (BAU) in the backdrop of rising COVID cases and the ensuing lockdown.

Occupiers, according to JLL – one of the leading real estate consulting firm – continue to adopt a cautious approach, reassessing their real estate portfolios and long-term commitments. The leasing momentum in the coming quarters, they believe, will depend on the time taken to contain the rising Covid cases.

“Increasing fears of a spike in Covid cases in the second half of March further pushed the occupiers to press pause again and postpone their real estate decisions,” said Dr. Samantak Das, chief economist and head of research & REIS, India at JLL.

Investors, too, have steered clear of real estate stocks with the Nifty Realty index slipping over 5 per cent in the last one month (since March 12 till date) as compared to 1.5 per cent fall in the Nifty50 index, shows data.

Long road home

While commercial leasing did pick up some momentum in the last quarter and before, experts say it is yet to come back to pre-COVID levels. Many IT/ITeS companies have again extended the work from home (WFH) option for their employees (many up to October 2021) and will decide on the future course of action depending on how the pandemic situation plays out. Those at Jefferies believe the return to normalcy for office and malls business is now pushed out by around two quarters to the second half of fiscal 2021-22 (2HFY22).

“The IT / ITeS sectors are among the prime drivers of overall leasing activity in the top cities. While many large companies renewed their office lease last year despite rising COVID-19 cases, there were others (such as Start-ups) who cancelled theirs. Now, with rising cases and the anticipation of broader lockdowns in some of the top cities, commercial leasing will walk a tightrope in 2021,” says Anuj Puri, chairman, ANAROCK Property Consultants.

A strong demand for office spaces in 2018 and 2019 and the expectation of a similar demand in 2020 (pre-COVID-19) had led developers to plan around 119 million square feet (msf) of new supply across the top 7 markets in India, reports suggest. With demand now looking weak, there is a risk that a large part of this supply may remain unabsorbed and impact rentals negatively.

Meanwhile, most mall developers had offered a 50 per cent rental waiver for the in FY21 given the loss of business due to lockdown. As per the agreement with most retailers (barring multiplexes), mall rentals were to revert back to pre-Covid minimum guarantee levels from the April – June 2021-22 quarter (Q1FY22), analysts say, which may again be renegotiated given the recent developments.

Pre-leased upcoming supply and near-term deals in the office leasing pipeline, according to channel checks by ICICI Securities, may get deferred by one or two quarters depending on how the Covid situation evolves. That apart, investors are also concerned that new supply will put pressure on rentals.

“Rising interest rates negatively impact the valuation of yield assets like REITs at least over the immediate term. We don’t rule out further near-term weakness if interest rates rise and office spaces report increased vacancies,” wrote Puneet Gulati and Akshay Malhotra of HSBC in a co-authored April 9 note.

Source: HSBC report

 

Investment strategy

Going ahead, analysts at ICICI Securities expect consolidation across the industry with market share gains for larger incumbents across real estate asset classes. Balance-sheet deleveraging, they feel, will continue to be a focus area for all listed developers.

“Real estate was one of the sectors impacted significantly by Covid/lockdown in FY21. Continued prevalence of WFH has negatively impacted office space requirement and we expect this trend to continue in FY22 as well. That said, residential real estate has made a strong comeback with the need for larger homes,” says Adhidev Chattopadhyay, an analyst tracking the sector at ICICI Securities.

A similar view is shared by G Chokkalingam, founder and chief investment officer at Equinomics Research. “Among the lot, Oberoi Realty, Sobha, Godrej Properties are relatively better off, but the decision not to extend stamp duty waiver on property registration in Maharashtra may be a short-term dampener. Resurgence of Covid will impact commercial players like DLF, Embassy Office Parks (EOP) and Brookfield India Real Estate Trust (BIRET),” he says.

Source: HSBC report