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
 "Real estate has a healthy demand outlook, but some hiccups remain")
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As the lockdown eased last year, demand for apartments surged across all major urban markets in H2FY21
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.
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.