Residential sales are experiencing a recovery after the second wave of Covid infections despite an increase in prices for end users. On the other hand, commercial real estate, which includes office space, is expected to experience better absorption in 3 to 6 months, as people return to the office after the effects of the Omicron variant become clearer, says Vijay KR. , Partner Deloitte India.
In an interview with Activity area, it discusses current real estate trends, the outlook for 2022 and how new asset classes – warehousing, data centers – are attracting the interest of institutional investors.
What are the residential trends for 2022?
Residential sales are booming and are expected to continue through 2022. There is pent-up demand in the market, and buying habits have changed along with the demands of working from home. People move to larger apartments – from 2BHK to 3BHK – keeping in mind that they will keep a room aside for work needs.
Additionally, mortgage rates are low, state governments have announced stamp duty reductions, and there is supply in the market with construction and projects resuming after Wave 2. At Deloitte, we’ve found that 74-75% of CXOs are optimistic about the recovery in residential demand.
Then there is also a concept of people investing in new assets where residential sales are on the line again.
Besides, the Center also stepped in by funding stalled projects for home buyers which was well received.
Another clear indicator of the dynamism of the sector is the stock market rally and the number of listed real estate companies.
Do you also expect commercial real estate to be back in full swing?
For commercial real estate, the slowdown in sales is expected to continue over the next three to six months. People are settling for hybrid models. But here again, as the standardization progresses, the levies will increase.
Yes, some plans for a return to power were affected as the second wave of infection took its toll; but normalization began towards the end of the year, after the holiday season.
Now, another interesting fact about office space is that with the advent of social distancing standards, space requirements are up to 120 square feet per person. From the normal benchmark of 125 square feet per person, it had fallen to 80-100 square feet per person. It started to grow to 100 square feet and continues to hover. So, in short, it will mean that the need for larger office space will increase.
Banks and financial institutions will be among the first to return to standardization; but IT and ITES will be among the last to return. Also in terms of markets, Mumbai would see a higher and faster rebound, while IT-focused cities like Hyderabad, Pune and Bengaluru would see slower absorption initially.
In terms of rent, I think Class A office space will hold up; or even go up. It is very unlikely that there will be a significant drop anytime soon.
What about the other segments?
If its coworking spaces, that too will see an increase in demand with rising occupancy rates. For example, when Class A offices are under construction, most large companies will consider hassle-free plug-and-play solutions. As IT and ITES watch work from anywhere, coworking spaces will take off.
Does Omicron pose a threat to recovery?
At the moment, we don’t know how this variant will play out. There is a rapid spread. The immediate numbers do not seem to be a cause for concern. The number of residential sales was not affected. At most, the absorption of commercial space may experience delays. But, one thing with the newer variants of infection is that the spike occurs faster. And after that, the rebound in economic activity is even faster. So let’s wait and watch.
Do you think the Indian real estate market is attracting interest from institutional investors?
International players are already making smart investments here. In 2021, Blackstone, Brookfield and a few others invested in warehousing, commercial office space, data centers, and more. Developers also monetize assets. We have seen two REITs listed despite the pandemic, and more are expected. I think it is a good time to invest in Indian real estate.
Additionally, alternative asset classes, by which we mean warehouses, data centers, etc., are gaining popularity with institutional investors.
So what are the prospects for investing in warehousing and data centers?
In India, the demand for warehousing is on the rise. The large storage needs are dictated by the players in electronic commerce and their distribution centers on the one hand; while the smaller warehouses – in the city – are driven by demand or increasing rapid trade, such as 30 minute delivery etc.
The demand for data centers is on the rise with increased internet penetration and an emphasis on 5G. Additionally, the Data Protection Bill requires Indian user data to be hosted in the country which is expected to give the segment a boost.
Any outlook on commodity price movements?
To be fair, price movements of key items like steel, cement, copper and also labor and paints in some cases are a concern. Most commodity prices are on the rise and early reports suggest this will be the trend for 2022.
Take for example TMT prices. They went from Rs 38,000 to Rs 40,000 per metric ton to around Rs 55,000 to 60,000 per metric ton.
And the cycle of high commodity costs is expected to continue for some time. We don’t see an immediate reduction.
The increase in commodity costs has been in the range of 20 to 30 percent depending on the stage of construction of the project. However, on the other hand, the cost increase for completed projects is 10 to 15 percent, with some specific variants.