Despite the rise in end-user prices, residential sales are seeing a boom after the second wave of Covid infections. On the other hand, commercial real estate, which includes office spaces, is expected to see better absorption over the next 3-6 months, as the effects of the Omicron version become more apparent once people bring it back to offices, said Vijay KR, partner Deloitte. It is called India.
in an interview to business LineIn this article, he talks about current trends in real estate, the outlook for 2022 and how new asset classes – warehousing, data centers – are generating interest among institutional investors.
What does the residential trend look like for 2022?
Residential sales are witnessing a boom and this is expected to continue till 2022. There is a decrease in demand in the market, along with the need to work from home, shopping habits have also changed. People are upgrading from 2BHK to 3BHK in larger apartments – bearing in mind that they will be setting aside one room for work requirements.
Also, home loan rates are low, as state governments have announced a cut in stamp duty and there is supply in the market with construction and projects resuming after the second wave. At Deloitte, we find that 74-75 per cent of CXOs are enthusiastic about the uptick in housing demand.
Then, there is also a concept of people investing in new properties where residential sales have come into play again.
Apart from this, the Center has also stepped in with funding of stalled projects for home buyers which have been well received.
The stock rally and the number of real estate companies listed is another clear indicator of the boom in the sector.
Do you expect commercial real estate to return in full swing as well?
For commercial real estate, the slow uptake is expected to continue over the next three to six months. People are adopting hybrid model. But there again, as normal, the offtake will increase.
Yes, some plans to go back to the office were hit as a second wave of infections wreaked havoc; But normalization started towards the end of the year after the festive season.
Now another interesting fact about office space is that with the advent of social distancing norms, the space requirement is increasing to 120 sq ft per person. As against the general benchmark of 125 sq ft per person, this had dropped to 80-100 sq ft per person. It started out growing to 100 square feet and continues to grow. So in short, this would mean that the need for larger office spaces would increase.
Banks and financial institutions will be among the first to go back to normalcy, and IT and ITeS will be the last. Also in terms of markets, Mumbai will see a higher and faster rebound while IT driven cities like Hyderabad, Pune and Bengaluru will see slow absorption initially.
In terms of rent, I believe the Grade A office space will remain intact; Or even move up. It is highly unlikely that there will be a major drop immediately.
What about the other sections?
The co-working space will also see an increase in demand as the occupancy rate increases. For example, when Grade A offices are under construction, most large corporates will look for hassle-free plug-and-play solutions. As IT and ITeS look at work from anywhere, it will be co-working spaces that will shut down.
Does Omicron post recovery risk?
As of now, we don’t know how this version will play out. There is a rapid spread, but the immediate numbers do not appear to be a cause for concern. Residential sales numbers have not been affected. At most, there may be some delay in commercial space absorption. But, one thing with the newer infection forms is that the peaking is rapid. And after that the economic activity gets faster and faster. So let’s wait and see.
Do you see the increasing interest of institutional investors in the Indian realty market?
International players are already making smart investments here. In 2021, Blackstone, Brookfield and others invested in warehousing, commercial office space, data centers and more. Developers are also monetizing assets. We saw two REIT listings despite the pandemic, and expect more. I think, this is a good time to invest in Indian real estate.
In addition, alternative asset classes, which means warehouses, data centers, etc., are gaining popularity among institutional investors.
So what’s the outlook on warehousing and data center investments?
The demand for storage is increasing in India. Large warehousing requirements are being driven by e-commerce players and their fulfillment centers on the one hand; Whereas smaller warehouses – within the city – are driven by the demand or growth of quick commerce, such as 30-minute deliveries and so on.
The demand for data centers has increased with increased internet penetration and a focus on 5G. In addition, the Data Protection Bill states that the data of Indian users should be kept in the country, which is expected to give a boost to this segment.
Any outlook on volatility in commodity prices?
To be fair, volatility in the prices of key commodities such as steel, cement, copper and in some cases labor and paint is a matter of concern. Most of the raw material prices are rising and initial reports suggest that this trend will go into 2022.
Take TMT prices for example. They have increased from ₹38,000 – 40,000 per tonne to about ₹55,000 – ₹60,000 per tonne. And the higher raw material cost cycle is expected to continue for some time. We don’t see any immediate shortage.
The cost of the commodity has increased by 20-30 per cent depending on the stage of construction the project is in. However, in contrast, cost escalation in completed projects is 10-15 per cent, with some micro-market-specific variations.
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