Investec on Real Estate Conference II Highlights key takeaways

The conference covered three key topics, (a) the future of stalled residential projects, (b) demand situation in CRE and (c) sustainability of sales trends in the residential sector. The demand for larger floorplates used by BPO and IT clients should be strong while demand for smaller floorplates from small business and front offices is going to be low, which implies that Bengaluru should revive first (followed by Hyderabad or Pune) while Mumbai may lag other cities. Finally on Residential, the demand revival should continue despite the rollback of stamp duty as demand revival outside Maharashtra was also strong.

8% of the projects launched since 2008 are stalled which equates to 4.5 lac units spread across 1500 projects. Of these, 44% are in NCR, 21% MMR and overall 85% in the top 8 cities. 52% of these stalled projects are delayed for more than 2 years and 18% by more than 5 years. These projects are 60% sold and hence there are investors or home buyers trapped in them. The total construction cost to complete all the projects is estimated at Rs 550 bn. The key mandate is to protect the savings of homebuyers and not to bailout builders or lenders and hence the eventual haircut for lenders can be high.

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Commercial real estate:

Embassy REITs management said that Bengaluru to bounce back first in Commercial real estate space while Mumbai and downtown Delhi could lag. Demand was certainly down in 2020 with net absorption of 25-26 mn in 2020 v/s 40mn in 2019. Customers that require big floor plates, the large MNCs with big back office operations which have the financial muscle to withstand the pandemic should return, reviving demand in this segment. However, it is the smaller business which requires smaller floor plates which have suffered. This evolving customer behaviour suggests that Bangalore as a back office market should bounce back the quickest compared to Mumbai which is more of a front office space where clients are now open for flexible office spaces.

Residential real estate - demand across India was strong not just Maharashtra:

Demand across India was strong, not just in Maharashtra, which suggests that the stamp duty cut was positive but not the only factor for demand. There was demand across developers and not just branded or top developers but even small developers saw volumes. Luxury apartments had good traction as top level jobs saw lesser impact. The speakers suggested that work from home is not going to be a permanent phenomenon. Finally, given the increase in construction costs, the low margins at which developers are operating and the strong demand situation, prices seem to have bottomed out.