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Navigating Volatility in Real Estate

As India fights the COVID-19 pandemic, real estate investors, occupiers and developers are re-strategizing to adjust to the emerging market conditions. In an exclusive conversation, Gagan Randev, National Director, Capital Markets, shares key insights and outlines the new opportunities emerging ahead of us.

Q 1. What are the short and long-term impacts of pandemic-induced volatility in the real estate sector?

Gagan: The pandemic will definitely impact the real estate sector in the short term and long term. In the short term, hospitality assets (hotels) and retail malls have already been severely hit. Malls across the country are closed and will likely see lower footfalls even post withdrawal of the lockdown. Both the tenants and mall operators will feel the pinch in terms of lower revenues, lower revenue shares and defaults/renegotiations of rentals for the closure period. Hotels are going to be worst impacted, with many in a state of closure, running at occupancy level of 10 percent or so. The residential sector is also likely to see a major impact in the short-term, with the uncertainty of the recovery leading to much lower interest and a wait-and-watch mode amongst home buyers. However, we foresee both malls and the residential sector bounce back in the medium-to-long term as confidence returns. But rentals for malls will take a hit.

We largely expect the leasing in the commercial sector to also bounce back without too much of an impact. But the sector would witness delay in sign-ups of large, new deals due to the impact faced by occupiers in their home countries. We expect renegotiation of rentals and primarily stagnant rentals in 2020. However, there will be major stress in the hospitality sector as hotels are likely to record poor performance given the low traffic in 2020. The return of traffic in the sector will only be gradual.

Q 2. What are the opportunity areas for investors during this downturn? Which segments should be ideal from an investing point of view?

Gagan: The downturn will throw up scores of opportunities. The cash flow of developers/owners will be stressed, and we can see a huge pick up in M&A activity in H2 of 2020. There would be a lot of stress in hotel assets and major M&A activity will follow as bank defaults increase. Moreover, we can expect transactions in retail space as values will be loosening given the rental rationalisation and volatility of 2020. There will be distressed opportunities available in hospitality sector and more reasonable deals available in retail and commercial sector as developers try and dispose of their existing assets to generate liquidity. There would be a slight cooling off in asset prices.
Q 3.  Are investment volumes expected to remain healthy in alternative segments like co-living, student housing, co-working, etc.
Gagan: While coliving and student housing are very robust sectors from a medium-to-long term perspective, they will be impacted in the short-term. Covid-19 is likely to create even more awareness for quality and hygienic accommodations and post the initial recovery phase, demand for coliving and student housing is going to come back even stronger. The coworking sector is likely to remain strong after the initial recovery phase (when people may be wary to work out of shared offices). In fact, there are likely to be dedicated coworking deals where companies could enlist a coworking service provider to take on a space solely for their use. This would give them the experience of flexibility in a dedicated space.
Q 4. Will the industrial and logistics sector continue to catch Private Equity (PE) firms' fancy in the current backdrop?
Gagan: The experience of COVID-19 is going to bring about the importance of e-commerce even more strongly to the forefront. The distribution capability of large companies is being sorely tested since the last month or so and companies and third -party logistics(3PL) players are going to expend their energies in getting their distribution and logistics networks in cracking shape. We are likely to see hectic expansion and continued PE investment in this sector.