Despite the COVID-19 pandemic’s recurring ups and downs, the Indian real estate market has proven mostly resilient. On the back of India’s strong position as a global economic driver, as well as attractive growth prospects across areas such as office, I&L, residential, and alternative real estate, it is now exhibiting indications of resurgence.

The pandemic’s second wave had a negative impact on the Indian economy and by implication on the real estate market too. Since then, we’ve come a long way. Leasing activity has increased in the last six months across all industries and segments and we expect this trend to continue through 2022. In fact, in terms of leasing and supply addition, the industry is likely to exceed pre-pandemic levels.

Hit hard by the pandemic, commercial real estate seems to be back on track. What is driving the growth of this segment?

Having overcome the blip of the past two years, the commercial real estate (CRE) segment is back in the reckoning. All CRE segments, including office, retail, industrial, logistics and hospitality, are doing well now and attracting increased investor interest. Taking a host of factors into account and based on data collated by various research agencies, the outlook for the segment, too, seems bright by all counts.

With long drawn-out closure of offices and the pandemic making working from home (WFH) the new way of working, new office space requirement was severely impacted. According to a JLL India report, new supply of office space across seven major cities in India declined 30% to 36.34 mn sq ft in 2020 from 51.62 mn sq ft in the previous year. However, the recovery began last year itself and the absorption of Grade-A office space is estimated to spurt in 2022, with Delhi-NCR accounting for the majority of the demand in this segment. In fact, office gross absorption across the top six cities has already seen almost a 3-fold rise to 14.7 million sq feet during Q2 2022 as compared to the same period last year, according to Colliers.

An additional factor that has been driving the demand for more office space is the requirement of maintaining a distance of 5-6 feet between workstations in offices, in keeping with the social distancing norms. Besides, the overall normalcy and the withdrawal of most pandemic-related curbs have brought the footfalls back to pre-Covid levels in markets, malls and restaurants, and that has led to a significant boost in the demand for these segments. Here again, with new norms in place, developers are going for retail spaces with touch-free and voice-controlled features to ensure the maximum possible safety.

The recent growth in the co-working sector and an increased demand for data centres are yet another reason for the commercial sector getting a big push. A phenomenal rise in digital transactions post-pandemic has necessitated the setting up of data centres across the country with regular rise in e-commerce activities, online education, data consumption and payment gateway. With this, the demand for data centres is set to rise by 25-35 per cent in the next two years, according to reports and that is obviously a big plus for the commercial segment.

Attributing the growth in the commercial segment largely to Government initiatives, Akshay Taneja, MD, TDI Infrastructure Ltd, said, “The Make in India campaign coupled with reforms like RERA and GST have come as a boon for the industry. Despite their initial reluctance, developers and buyers are moving to the commercial real estate sector due to the transparency and competence of the sector. The overall economic growth is also driving demand for commercial property.”

According to the latest Outlook 2022 report by Knight Frank India, the commercial real estate sectors would experience stable and sustainable growth in 2022. Also, a joint report by Colliers and Qdesq says that the absorption of office space will cross 60 million square feet in metro and non-metro cities by 2023. The tepid demand for the last two years has converted into an agile and flexible work model and this is what is driving the commercial real estate demand. Large businesses dealing in IT-Business Process Management, e-commerce and consulting would be the leading occupiers.

Since commercial spaces offer much higher rental yields, investors are obviously drawn more towards this segment. Attractive appreciation potential, recurrent rental income and tangible nature of the sector have resulted in renewed interest from them. Besides, with the investment process in the commercial real estate becoming more stable, transparent and efficient with the advent of REITs, the funding in the segment has grown manifold.

The investment by millennial NRI investors is of particular significance in this regard. According to a MYRE Capital survey, 53% of the NRI investors choose commercial real estate as their favourite investment vehicle over ETFs (21%) and mutual funds (19%), with the average ticket size for an NRI being higher, at Rs 38 lakh, as compared to a resident CRE investor.

LC Mittal, Director, Motia Developers is of the view that the lockdown has offered new innovative concepts to the commercial real estate sector and increased the demand for rental properties with great amenities. He said, “Commercial real estate is expected to flourish in the next few months at a faster pace. Both rental and capital value for commercial property will rise in the market. The corporate world has begun to show active participation in expanding its ventures; and that’s a healthy portent for the commercial realty sector.”

“The commercial sector,” said Kunal Bhalla, Founder and CEO, CRC Group, “has seen a massive turnaround as a result of the multiple business-friendly initiatives announced by the government.” “Moreover, commercial assets, such as offices, shops, warehouses, and other commercial properties, are considered the most secure investments because they generate recurring rental revenue. This view has only been strengthened post-pandemic and it is going to remain the driving factor for investment in times to come,” he added.

As prices move up, inventories drop, and active home buyer numbers show only a marginal drop, the Indian housing industry finds itself at a crossroads

Urban India has housed itself very well in the past three years. After an almost seven-year hiatus, housing demand picked up, hitting unprecedented levels during the pandemic. Major reports issued after the first half-year analysis in 2022 showed more launches, higher sales, and increasing levels of ownership among end-users.

However, home buyers in India, like the country’s economy, have been divided into two distinct sections. After the pandemic, those employed in the upper strata of the workforce, especially in IT, BFSI, and formal industries, have performed well and with three years of limited or no spending, have used the corpus they accumulated to buy homes to live in. The lowest-ever level of home loan interest rates also ensured that borrowers were able to get more finance to buy bigger homes.

The Rs 1 crore and above homes witnessed a growth of about 25 percent, according to a Knight Frank report. The Gera Pune Residential Realty report pegged sales in Pune city at ​​105,625 homes, a 25 percent growth year-on-year. The Anarock report recorded brisk sales in the January-June period with the second quarter recording lower sales than the January-March quarter.

Interestingly though, the Gera report pointed out the stark difference in sales patterns in 2019 vs 2022. Budget homes costing less than Rs 4,236/sq. ft. accounted for a mere 28 percent in 2022, compared with 57 percent in 2019. The share in new launches of affordable homes has correspondingly dropped from 42.2 percent in June 2019 to 21 percent in June 2022. Meanwhile, the share of super-premium luxury housing of about Rs 8,000/sq. ft. and above, rose from 0.6 percent of the total stock in 2019 to 2.2 percent of the total stock in June 2022. Today, it accounts for 20 percent of new stock released.

So, what has resulted in this change? The housing industry, like the automobile industry, is shifting towards to the premium segment at the cost of the budget category. Last week, Maruti Suzuki announced its intent to focus on premium SUV segments, and downplay or even consider moving out of the value and budget cars. The consumer base displaced from the workforce during the shutdowns have now re-entered as part of the gig economy. They have the earning power to stay in the city but not enough to purchase an asset where the payments are large and long-term. In many cases, access to credit is also a challenge as security of tenure is not assured.

This affordable housing segment was also the most sensitive to rise in interest rates. As the Reserve Bank of India (RBI) raised repo rates to contain inflation, home loan interest rates have risen too, and are likely to rise further. This effectively means that the amount of loan that can be accessed by a borrower falls and, in many cases, becomes less than what is required to buy a house in the affordable category.

The Magicbricks Propindex for June 2022 noted, “The average rates of ready-to-move (RTM) properties saw an upward movement by 2.3% QoQ & 6.4% YoY”. While the mid and premium segments can still afford to absorb that, the lower income categories, already squeezed by inflation at home, may opt out of buying for the medium term. This may lead to a robust demand for rental housing in the affordable segment.

The real estate industry needs safeguards. The pace and strength of home buying over the past three years was triggered by the fear of moving around during the pandemic as well as the pent-up demand of the past seven years. The advent of the Real Estate Regulatory Authority (RERA) six years ago pushed the industry to use collected money to complete projects, and maintain escrow accounts. This led to increased consumer confidence. The evidence on the ground that showed stalled projects moving towards completion also added to the consumer confidence levels.

Buying completed inventory at a time when consumers wanted to own houses rather than leasing it, was relatively risk-free. The risk of the wait period, and delay, was practically eliminated.

However, every report today points to much lower inventory overhangs of just 7-9 months left. Will consumers continue to buy under-construction properties at the same pace, even with RERA in place? Will developers ensure financial closure of projects before launch so that they have enough money to execute, even if sales volumes are low? Will the volume of luxury properties being built continue to be picked up at the same pace?

The industry is at a crossroads. It has resorted to launching smaller phases of projects, and is focussed on execution and delivery. Buying trends are far from stable, and may continue to change. But an agile and restrained industry should be able to meet this demand.

E Jayashree Kurup, Director, Real Estate & Cities, Wordmeister Editorial Services, writes on real estate and housing. Views are personal and do not represent the stand of this publication.