Indian Real Estate 2020AC (After COVID) – A Full Reset

MACRO OVERVIEW Central Governments across the world have provided massive stimulus to solve the economic problems arising due to the COVID-19 crisis, however, it is still likely that the United States and most parts of Europe are going to go into recession in 2020, impacting global growth. As developed countries fire-fight problems in their own country, capital flows will be restricted to emerging economies like India in 2020. Two reasons: a) Post the recent correction, the Dollar adjusted returns in their home countries are comparable to those in emerging markets, b) National interests will supersede global interests; we will see more Nationalism and Regionalism in 2020. The Indian government has made it clear that their priority is to tackle the health crisis first and then look at the economic impact, which is the right call given the fragility of our healthcare system. India’s Sovereign rating is BBB-, the Lowest Investment Grade. If it gets further downgraded to below Investment Grade (Junk), that would in turn severely affect the economy. This is one of the reasons why it will be difficult for the Indian Government to print money and expand the balance sheet significantly. Most economists think Indian GDP growth will be around 2% in FY21, this will put pressure on the overall economy and lead to unemployment challenges. On the positive side, the sharp fall in Oil prices will definitely benefit India; this will help manage the current account and inflation. Additionally, India’s large foreign exchange reserves of >$450 billion is reassuring during this crisis period. INDIAN REAL ESTATE SECTOR The Indian Real Estate sector has had a tough run over the last few years; there was optimism that on the back of strong Commercial Real Estate demand in 2019, the Residential market (which accounts for approx. 75%-80% of Indian Real Estate) could see a revival in 2020. However, the COVID-19 related economic crisis has derailed this recovery. NBFCs who have done most of the heavy lifting when it comes to providing liquidity to the Real Estate sector in recent years are dealing with their own set of liquidity problems. While some of them had worked on raising capital to solve the near-term Liability side issues on their Balance Sheet, they will now need to very closely monitor the Asset side, and in many cases, look at restructuring loans. Unless the RBI steps in with remedial measures, it is expected that Banks and NBFCs will need to a recognize of a lot more NPAs in FY21. It is unlikely that global capital will flock to the distressed opportunities in the Indian Real Estate sector. The financial returns in their home country on a Dollar and risk adjusted basis, may appear much more attractive, in the near term. Sector overview: Residential - Prices are expected to come down by at least 15-20% in most micro markets. However, with a lower number of launches in the last couple years and improving (albeit slowly) demand, the unsold inventory is reaching more palatable levels + mortgage rates are also trending lower - both positive signs! Commercial – 2019 was one of the strongest years for Commercial Real estate with record absorption of >60mn sqft. However, 2020 will be a very challenging year; absorption may be 30-40% lower than 2019 coupled with rental yield and collection pressures. Retail and Hospitality – Unfortunately, this sector will face severe headwinds; the Government will need to come out with measures to ensure they have a softer landing. Industrial, Warehousing – A small, but fast-growing space in Indian Real Estate. This may be the bright spark within Real Estate in 2020, due to the demand from e-commerce and manufacturing. RECOMMENDATIONS TO INDUSTRY STAKEHOLDERS Government: The Construction and Real Estate sector, after Agriculture, is the largest employer in the country. Keeping this in mind, rational demands made by the various Industry Associations should be debated seriously and implemented. A large stimulus is needed to support the sector, similar to a TARP (Troubled Asset Relief Program) the United States instituted post the 2008 Global Financial Crisis, or maybe issue tax-free bonds for the Real Estate sector. Banks and especially NBFCs need to be given the support to continue lending to the Real Estate sector. It is estimated that approximately Rs. 700,000 Cr has been collectively lent to the sector; if the liquidity stops flowing to complete ongoing projects, a large part of this capital will come under severe stress. Many more funds like SBI Capital’s SWAMIH fund are required to help provide liquidity to the sector. Subvention schemes should be re-allowed for home buyers. The consumer neither has the confidence nor the Capital to make investments in this uncertain environment. One needs to provide support to them in order to bring them back to buying Real Estate.