COVID-19 Impact: As we are in mid-2020, the dark cloud of COVID-19 looms over organizations across the country. The most prominent victim of this ongoing outbreak is the commercial real estate sector, which has not only disrupted the cash flow affecting companies' ability to pay rents but has also severely hampered the supply of construction and reforms across the country.
This, coupled with the fear of a global recession, has left the Indian real estate sector in a world of uncertainty, as investors grapple with the new environment and reassess their investment strategy. In recent years, commercial real estate has become the preferred investment choice for institutional investors, due to its high annual return.
According to data released by ANAROCK, between 2015 and the third quarter of 2019, India's real estate sector attracted nearly $ 14 billion in foreign private investment in private equity. These statistics, along with the success of Embassy Park REIT IPO in March 2019, have highlighted the attractiveness of opportunities in this sector.
COVID-19 Impact:
Symptomatic effects of the virus
Despite the growth, due to the current instability of the global meltdown and the uncertainty about closure restrictions, companies that have rented office space find it difficult to pay rent payments. Many of the global QSR series have even written to homeowners asking for an exemption from the rent due to a mandatory but mandatory government ban. In such circumstances, while many tenants may choose to invoke the terms of "force majeure" in their contract to avoid paying rent, the applicability of the above, especially in the current situation, remains in doubt.
When a similar question was asked during the SARS epidemic in 2003, Hong Kong courts did not allow tenants to evade payment obligations in lease contracts. The Indian judiciary took a similar stance during this COVID-19 pandemic, and the Supreme Court, after much consideration, rejected the Debt Prevention Act to obtain an exemption from paying office rent by defenders who incurred financial losses.
Given the general economic outlook, termination of lease contracts may not be a commercially viable option for the landlord or tenant in the foreseeable future, the only tangible solution may be to sit across the table (almost!) And renegotiate the terms of the lease. However, given that homeowners will experience a noticeable loss of income, commercial real estate will be one of the hardest-hit sectors, even from a credit rating perspective.
Immunity building measures
Given the challenges they face, both the Regional and Central Office and the central government have introduced relief measures to counter the effects of the outbreak. The RBI announced a one-year extension to repay loans used for late commercial real estate projects, for reasons beyond the developers' control.
Besides, the announcement of the central government to extend the deadline for completion of real estate projects by dealing with the outbreak of the disease as a force majeure under the Real Estate Regulatory Agency will serve as a respite for the sector. Moreover, relief measures for NBFCs in the form of liquidity enhancements should help, as they will provide a much-needed credit line for the private cash sector.
Seasonal or chronic pain?
Regarding the short-term impact of COVID-19 on demand, ANAROCK estimated that absorption of office space is likely to decrease by 15-30% in 2020. Also according to recent statistics published by JLL India, institutional investments in the real estate sector the sector decreased by 58% in the quarter that ended in March 2020, compared to last year.
Although this fall reflects global trends, the effect of COVID-19 has cracked the solid shield of this sector, and the same may not affect its growth in the medium and long term. It remains to be seen whether investors with long-term investment prospects mixed with dry powder at their disposal benefit from this temporary downward trend and double their stakes in the strong and reliable commercial real estate sector.
According to NDTV, Stephen Schwarzman, CEO, and co-founder of Blackstone stated during his recent visit to India that the fund is optimistic about India. From a long-term perspective: If you were to ask the same question today, it would be a good bet that your feelings won't be affected much, even though COVID-19 really succeeded.
Everything is equal if commercial real estate players play their cards in this poker game, and regardless of short-term gains, the outbreak of COVID-19 could end in a seasonal flu situation that causes a temporary slowdown, rather than a fatal blow to the sector.
img source: nelson mullins
article source: cnbctv18
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