Tuesday, May 19, 2020

KPMG Report -COVID-19: React, adapt and recover – The new reality : A perspective on the Indian real estate sector”

In the context of the ongoing pandemic, KPMG has recently launched a report titled, “COVID-19: React, adapt and recover – The new reality : A perspective on the Indian real estate sector” which attempts to unravel the possible opportunities with key real estate segments and suggests workable strategies to capitalize the emerging potential for industry stakeholders. This report undertakes a diagnostic assessment to inform on the expected outlook for key real estate sub-segments within the real estate sector in India over the short, medium and long term; identifying critical impacts and plausible outcomes.

  • Short-term Impact: The short-term impact in coming 6–12 months is likely to be a dampener for real estate sector’s recovery, forcing sector entities to contract operations, revisit planned developments, expansions, and investments across the real estate sector. Counter strategies to mitigate the impact shall likely focus on cost optimization, liquidity improvement, space design/layout efficiency maximization, re-negotiations of contracts, and calibration of business operating models across the board

  • Medium-term Impact: As the situation moves closer to normalization with lockdown easements across India and globally in the medium term, recovery process will see rapid traction, bringing new opportunities within specific real estate segments

  • Long-term Impact: With staggered revival, the long-term outlook for real estate sector in the coming 18–24 months may likely emerge positive. Albeit social distancing norms and workplace health safety regulations affecting contraction, the real estate industry’s structural transformations will bring forth latent opportunities within untapped real estate segments such as data centers, integrated supply chains, warehousing, self-sustaining industrial parks, design efficiency processes social distancing and preventive hygiene cognizant commercial and hospitality spaces

Talking about the sector, Chintan Patel, Partner and Leader – Building, Construction and Real Estate, KPMG in India, said “With this recent pandemic outbreak, the real estate sector is likely to be handicapped in the short term, impacting over 250 related industries and economic sectors. In addition to capitalizing on the intervention proposed by the Government, the industry should resume operations post lockdown by leveraging technology innovations for enabling employee and consumer health safety standards, design flexibility (Work from Home), cost optimization and consumer engagement (such as AI, VR, BIM, etc.), focused localization of supply chains, reorganization of business models, which is likely to revive activity, accelerating Indian real estate’s turnaround over the coming 12–18 months. Ongoing financial woes as well as an unprecedented global crisis of the pandemic have unsettled the investment climate and almost no industry is insulated from its impact.”

Below are key highlights of the report:

Potential impact of COVID-19 on various asset classes:

Residential sector (Housing, Co-living/Student housing)

  • Tapered sales: Pre-COVID-19 challenges related to subdued demand and liquidity pressures to continue creating slowdown in sales in the short – medium term
  • Inventory contraction: Credit crunch impact to create residential sales contraction; bringing down sales from 4 lakh units in 2019-20 to 2.8 lakh-3 lakh units in 2020-21 across in top 7 cities
Commercial sector (Office, Co-working)

  • IT and BPM to continue demand levels: Despite the lockdown scenario and subsequent easing of restrictions, IT-BPM sector is anticipated to continue driving demand for office space
  • Flexible workspaces will re-evaluate models: Despite steady leasing in flexible workspaces across major Indian cities the segment will face major headwinds over the next 9-12 months period
Facilities Management (FM)

  • Business continuity: FM to emerge as critical enabler to supporting business continuity during the current pandemic ensuring normalcy in office operations and technology support (remote working) for transitioning back to “business as usual”
  • Portfolio realignment: FM companies may look to diversify their client beyond traditional go to sectors such as office and retail to hedge risks. Post pandemic flattening, sectors such as pharma, healthcare will witness stronger cashflows while industrial segments such as manufacturing and warehousing may also see positive growth
Retail real estate – Recovery expected despite uphill challenges

Although India's consumption expenditure stood at USD 1.92 trillion in 2018 growing at a CAGR of 7 per cent for the last 9 years. Post lockdown, consumer discretionary spending is likely to remain subdued.
  • Medium term potential impact – partial lockdown leasing: 50-60 per cent contraction in mall footfalls expected from pre-COVID-19 levels coupled with a significant downtick in overall trading density
Hospitality sector:
  • Short term impact (0-9 months): Operating performance of hotels for Q2 and Q3 of 2020 is likely to be poor
  • Medium term impact (9-18 months): Recovery to vary and be contingent upon sector dynamics – Sectors where remote working is not feasible (such as Manufacturing, Defense etc.) to see quicker recovery, which would lead to improved domestic business travel
Industrial:
The post-COVID-19 outlook for industrial real estate will be a mixed bag; wherein on one side industry struggles with supply side disruptions for maintaining operational capacity while on the other side, focus on localisation of supply chains and catering to domestic demand will provide fillip for capacity additions, diversification and expansions.

  • Short term impact (6-12 months): Freeing up of land parcels currently locked up as Nonperforming asset (NPA’) to likely improve land supply for industrial use, mitigating any upward inflation in land pricing
  • Long term impact (18-36 months): Taking cues from China and the Middle East, self-sustaining large industrial hubs may emerge on account of better ability to counter lock down situations
Warehousing-A quicker recovery supported by E-Commerce:
  • Short term impact (coming 9-12 months): India’s current warehousing sector market had robust absorption volumes of ~37 MSF in 2019. However, new leasing activity in 2020 is expected to witness a sharp decline (~40 to 50 per cent) compared to 2019
  • Long term impact (24- 48 months): Restructured supply chains, preference for local distribution centers and potential shift of global manufacturers from China to other ASEAN countries and India. Ease of doing business and policy framework stability are key to make India a manufacturing hub
Data Centers-An essential service in the new digital paradigm
  • Overall data traffic has increased more than 20 per cent compared to the pre-COVID-19 period
  • Demand for virtualization, managed services and cloud infrastructure gaining traction as enterprise data centres face access restrictions
Recommendations for the Government:
The Government should support the sector by undertaking the following measures to enable the sector to not only survive but to perform to its fullest potential:
  • Financial support in the form of providing additional funding, loosening lending norms, extending repayment schedules, etc.
  • Regulatory support in the form of reducing the number of approvals, reducing the timelines for approvals, reducing fees and premiums, etc.
  • Fiscal support in the form of tax incentives and reduction in GST rates, etc.

8 comments:

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Can you please provide the link to the report?

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