Impact of the Covid-19 on the Commercial Real Estate in India

commercial real estate
Impact of the Covid-19 on the Commercial Real Estate in India

Even though the commercial real estate remains optimistic, the adverse impact of the Covid-19 pandemic is visible on this segment too. This unprecedented situation had put this sector virtually on hold as most of the business activities came to a grinding halt across the world due to this pandemic. Many affected countries including India had taken stern measures to contain the spread of this pandemic which had resulted in the closure of malls, retail outlets, and other business activity spaces. The negative impact of the Covid-19 is still being felt across the world.

Some global rating agencies slashed growth forecasts for the global economy including India. After India had witnessed the decline of the gross domestic product (GDP) numbers for the first quarter of FY21 showing a decline of 23.9 % over the same quarter last fiscal earlier, some global rating agencies projected the Indian economy to contract by 11.5 % and 10.5 %, respectively, in the current fiscal.

According to government projections, India’s GDP growth is estimated to contract by a record 7.7 % during 2020-21 with the pandemic’s adverse effect on the manufacturing and services segments. The International Monetary Fund (IMF) in its World Economic Outlook released on January 26, 2021, predicted India’s economy to contract at 8 % in the current financial year. However, the IMF expects the Indian economy to grow at an 11.5 % rate in the next financial year before slowing to 6.8 % in 2022-23. As GDP growth in India is expected to happen through the V-shaped recovery, this means India can be the fastest-growing economy in the world in the coming years.

Office Spaces in India

While the adverse effects of the Covid-19 were being felt across the world, many companies worldwide had shifted to the culture of work-from-home / remote working for employees, to contain the spread of the infections. Consequently, office utilization rates fell down drastically and triggering a debate on the relevance of future workplaces in a post-Coronavirus world.

Currently, the remote working culture is gaining traction as businesses embrace this new working culture. Occupancy levels in office spaces have declined as the workplace is no longer a single location but has become an ecosystem with less centralized and widely distributed teams appropriately linked through technology. Some businesses have opted for a hybrid work model also, wherein, a portion of the workforce work-from-anywhere with the option to operate from remote locations.

The aspect of immediate recovery in office spaces remains a concern in light of the new concept of work-from-home or work from a remote location. The success of this concept would depend on the level of success achieved by companies during this pandemic period. It might have been a reaction to the nationwide lockdown to contain the Coronavirus outbreak and it may not become a permanent concept in the companies’ strategies.

India coped very well with the shift in the workplace during the lockdown period and has continued to do so with limited re-opening in this sector. According to a report of JLL a global property brokerage, net leasing of office space fell by 50 % in the quarter of July to September 2020, across seven major cities in India to 5.4 million sq ft as many players have deferred their expansion plans following the pandemic.

However, the demand for office spaces is likely to remain robust as a majority of the firms are likely to retain this traditional model post-Covid-19 pandemic era. According to NAREDCO India, the demand for commercial office space is expected to be back to 80 percent of the pre-COVID level after July as more people return to work after the Covid-19 vaccination drive.

Retail Sector in India

The recent growth of the Indian retail sector has seen rapid evolution and growing integration of online and offline retail formats. The sector has gone through a phase of transformation by adopting new technologies and new approaches to fulfill consumer demand. The COVID-19 pandemic has accelerated many of these trends, with e-retail quickly becoming a new norm of shopping behavior of a large number of consumers.

The effect of Coronavirus infections has resulted in lesser footfall in malls in India after the government’s limited reopening order. This segment continues to suffer as survey report shows that lockdown relaxations did not benefit retailers as business remained lackluster.

The positive side of the Coronavirus effect is that it has made people worldwide more health-conscious. Now they prefer to dine at home more frequently. Therefore, players with rationalized spaces, a robust home-delivery model, and increasingly digitize merchandising would continue to expand. Now the post-Covid-19 pandemic era would witness a re-evolution of the role of brick-and-mortar stores to serve as platforms to engage consumers and enhance brandings. To achieve this purpose a thorough re-designing and a new operation model would be required of the retail segment.

During the year 2020, only a few new malls started operations in some of the leading cities in India. This also reflects the state of crisis in India’s retail segment as mall operators have been the most affected section. The growth of the Indian retail segment is the most critical one as it may take slightly longer to limp back to normalcy from the adverse impact of Covid-19.

Now, the evolution of new work patterns posts Covid-19 era would alter the way both consumers and developers have operated so far as to how office space would be used and designed and the role played by the tech. More investment will be required in future office spaces to make them better prepared for crisis situations.

Eventually, mall owners must act reasonably well to increase the number of footfalls in the shopping centers to tide over the crisis in the retail segment. This can be achieved only through a fundamental shift in the approaches of mall owners as to how they will now look at this segment. An increased focus on air quality, improved hygiene, and sanitization is what will help the consumers to regain the confidence to throng malls in large numbers and increase the footfalls.

Warehousing in India

As e-commerce is expected to grow significantly in the post-COVID-19 world, the warehousing sector in India would also stand to gain immensely as the growth will spread across smaller cities too.

According to NAREDCO India, the worst is over for the sector, but more financial support is required to bring it back on the growth trajectory. According to a report by Knight Frank, of the total private equity investment of USD 2.31 billion in the first nine months of 2020, the office sector claimed 81 % share followed by warehousing at 10 %. While the commercial sector continues to attract investors, because of its strong fundamentals, the commercial sector remains attractive to investors because of strong fundamentals, and some reports also indicate that investment will remain positive in the medium-to-long term.

Some more positive sentiments are also visible across the country after the rollout of the biggest Covid-19 vaccination drive in India from mid-January 2021. Therefore, the commercial real estate sector also can witness increased transactions and positive consumer demand after this vaccination drive.

The commercial real estate sector has seen accelerated growth and made big progress in the past decade. Increased consumer demands along with the emergence of institutional capital have accelerated this growth. While the pandemic has badly impacted this sector in India too, it can recover quickly as well because of better access to liquidity and lower risk of defaults.

Also read: Impact of Covid-19 on Indian Housing Market And What lies ahead Post Its Vaccination Drive

Impact of the Covid-19 on the Commercial Real Estate in India