Given the already despondent situation within many segments of real estate, doomsday preppers are out in large numbers. While developers are being advised to reset home prices to spur demand, some hotels are seeking a change of land use to residential. Office space demand is suddenly shrinking and retail malls are seeing tenants cancelling leases or refusing to pay rent.
Moreover, consumers who own a home or who wish to own a home in the near future are also confused. How does one conserve and revive their investments? When to make new bets and where? What to choose in order to be aligned with the emerging trends?
Real estate does not merely comprise buildings made of brick, mortar, glass and steel. It is an enabler of our existence and well-being. Contrary to fears and low expectations, real estate in the post-covid world will most likely survive and eventually thrive as an asset class, though it will look different. Decentralization, redistribution and restructuring will be the major themes of this transformation.
While it is early days yet, there are visible indications of some of the ways in which the pandemic may alter things for both consumers and developers. It is important to note that the winds of change have been triggered not just by the pandemic.
There has been a need for many of these changes and the lockdown has made all stakeholders, including governments, think and act in ways that have heightened this realization.
Home as the key driver
The home will gain more prominence over the place of work and influence urban development and our real estate choices.
The good news for India is that the long-term housing demand trend remains secular due to a young population which continues to enter the workforce in large numbers. Over the last few years, there had been a gradual shift in mindset among first-time homebuyers who began to favour a rental home, challenging the established preference of Indians to buy homes.
The pandemic is driving them back to the desire to own a home. Real estate investments provide a higher sense of security during a crisis, when financial assets come under pressure. Additional space at home, as warranted by work-from-home, is an important consideration as well.
With the constraint of having to stay near one’s place of work having vanished for some and reduced for many, there will be an increasing preference to move away from the polluted and congested parts of the city. Cities like Bengaluru, supported by imminent metro rail connectivity, are already witnessing a shift toward the suburbs. This, backed by the sound economics of owning a home in the suburbs compared to paying high rentals in city centre apartments, is shifting the preference back towards ownership in more affordable peripheral locations. There will be a marked preference for plotted residential developments or a floor thereof (“builder floors") over apartments due to lesser density, more open spaces and lower cost of acquisition.
The de-densification of cities will not end at the metro suburbs. With better connecting infrastructure, satellite towns will emerge and what we saw in the case of National Capital Region could get replicated in other metros. Few people realize that the NCR comprises not just Noida and Gurgaon but also cities like Rohtak, Aligarh, Meerut and Mathura—which might be 180km away from Delhi, but just a two-hour drive from Noida on a world-class expressway.
Bangalore with its five self-contained satellite townships plan or the developments around Chennai along the Chennai-Vizag and Chennai-Bengaluru corridor are similar initiatives which will now gain faster traction.
This move to mini-metros and emerging cities will also be supported by the agenda of the government of India to develop infrastructure in tier II and III towns through the Smart Cities project.
The Goa government has been working in partnership with Software Technology Parks of India (STPI) to create the infrastructure to facilitate software exports and promote tech entrepreneurship in the region. As tech companies become location agnostic, options like Goa will beckon more strongly and not just remain a utopian dream. There have been companies like Zoho whose founder Sridhar Vembu runs a globally recognized software services company from a village 650km from Chennai. Surely replicating that model would be easier in cities like Indore where the infrastructure and the talent is available in plenty, with add-ons like enjoying the cleanest city in the country and the best vegetarian food on this planet.
The new office
The commercial office sector was the most favoured segment for institutional investors and had reached a peak in terms of pricing prior to the pandemic. The impact on the sector is expected to be severe in view of the reduced space requirement by information technology companies due to increased adoption of the work-from-home model which is now becoming an integral part of their long-term strategy.
Further, office space taken up by startups and smaller companies is facing challenges due to funding and business headwinds faced by them. Health and hygiene would take precedence over space efficiencies and offices would be redesigned for the post-covid world.
Business CEOs would look to minimize costs and the most glitzy building in the heart of the commercial district might no longer hold the same appeal. Offices will be distributed into “spoke" locations (for those who can’t work from home or need to work in groups) linked to a “hub" which would be some variant of the erstwhile “corporate head office".
While what shape the office takes will depend on the nature of business and “people strategy" of each company, needless to say, the commercial sector has been turned on its head. Smaller commercial buildings without central air-conditioning offering “independent offices" could be one answer. These would be independent buildings or those built in the SCO (shop-cum-office) model on smaller plots of land and would be spread across the city and the suburbs.
Massive change in the retail real estate segment was waiting to happen with the predominance of online buying, which had begun affecting physical stores that had high fixed costs. The reasons for being in a mall were being questioned already, with the benefits not measuring up to the cost for many tenants who were waiting for their leases to expire before moving out.
Post covid, demand for retail space would also undergo a change. There will be a preference for common spaces that are open to the sky and have independent access to shops and showrooms. The shops and showrooms would have their own air-conditioning, which would minimize common area maintenance charges. Shopping complexes on the lines of Khan Market in New Delhi or Chandigarh-styled markets comprising SCOs would be preferred.
SCO-style strip malls and outlet centres in the suburbs with high-street shopping in the city will gain prominence over large format centrally air-conditioned malls. In these newer formats, retail would be centred more around food service, wellness, leisure and entertainment, with a diminished focus on shopping.
In the hospitality sector too, hotels will be under severe pressure, especially single properties built with financial leverage which will likely get repossessed by the lenders. Many independent properties with less than 20 rooms or assets which had been hurriedly converted into hostels and guest houses would likely see closures and conversion back to residential use.
The investment bets
Prior to the pandemic, institutional investment in real estate was largely flowing toward rent-yielding warehousing and retail/office assets. With these offices and the retail industry facing a downturn, student housing, co-living and data centre hosting are the other niches which are attracting institutional investors. Warehousing was already in growth mode due to positive goods and services tax (GST) implications and now substantial demand increase is envisaged from e-commerce and resultant space requirement for warehousing. Increased institutional capital is expected to be directed towards warehousing to meet this demand. In the coming months, the pace would get accelerated with the e-commerce biggies renting space across the country with many new cities and towns getting added to this footprint.
Other competing niches such as student housing and co-living have been on the radar of developers backed by institutional capital seeking income-yielding assets. While developers are working out the right business model to capture value from this asset class, inherent demand has put this segment at the forefront. Present players in student housing and co-living have largely utilized existing real estate, but future investments would involve built-to-suit developments as well. Further, covid had already accelerated demand for data centres for hosting, storage and accommodating increased internet traffic. The government has allowed private companies to build data centre parks and this will be an attractive emerging asset class.
Flux in consumer housing
In the consumer housing segment, subdued sales, margin squeezes and high leverage was already plaguing the sector prior to the pandemic. Amid the crisis, corporate developers who have strong brand equity and institutional capital support will gain higher market share. The stressed and weaker players are divesting their assets to these platforms through land sale or entering into joint development agreements and business takeovers.
Those facing bankruptcy are agreeing to bring in stronger players through a resolution plan approved by their lenders and customers. This consolidation in the industry will pick up pace as the severity in the prevailing conditions has only worsened. However, this pain will result in better customer centricity and the use of technology for greater business efficiency.
Pre-covid, adoption of technology by the real estate developers was limited to listing properties online. During the lockdown, developers came up with offerings, wherein, site visit was done virtually through 3D site walk-throughs extending up to online documentation support and fulfilment. Developers are now weaving virtual site tours, virtual reality online booking, chatbots and payment platforms into their digital strategy for communication and selling. The benefit gained by developers through technology efficiency and disintermediation would inevitably be passed on to the end customer in some measure in the form of price moderation along with easier reach and transparency. Developers are already holding unfinished residential and commercial inventories under various stages of development, so greenfield and expansion projects would be deferred for a long time.
Real estate enables how we live, work, learn and play goes the cliché. Covid-19 has not only stalled the economy but impacted our lives enough for many of us to think ahead and contemplate pressing the reset button on the “live, work, learn, play" routine. Rather than procrastinating, now is as good a time as any to act, though in a thoughtful manner. For after weathering this storm, real estate as an asset class shall emerge stronger.
Om Chaudhry and Gautam Vashisht are chief executive officer and chief investment officer, respectively, of FIRE Capital Fund, which is among India’s first private equity funds in the real estate sector