We are clearly in uncharted territories with the spread of Covid-19 and no one has any definitive answer on the sort of economic damage this would have caused once the situation is brought under control. The imposition of a 21-day lockdown (as of now) has brought the entire real estate sector to a standstill. The real estate sector was already going through a lean patch with dwindling sales, supply glut, funding issues and waning investment demand for the last several years. The outbreak of this pandemic and consequent lockdown has brought it to a grinding halt.
In this series, we will attempt to evaluate the impact of Covid-19 on various sub-sectors within the real estate space and make an attempt to answer the following key questions:
- What would be the immediate impact of the lockdown on the sector?
- What are the key trends to watch out for once the lockdown is lifted which would impact the market in the near term?
We initiate this series with the RESIDENTIAL RENTAL MARKET and make an attempt to throw some light on the above aspects.
IMPACT OF LOCKDOWN ON THE SECTOR
The Residential Rental Market suffers an immediate impact from a lockdown of this nature which curtails physical movement. Unlike other industries which could still operate at a sub-optimal capacity while working in a WFH scenario, this sector comes to a virtual halt in a lockdown scenario. All core activities like home search, registration, giving handover of apartments to prospective tenants, obtaining requisite approvals etc have been put on hold until the completion of lockdown period.
- Rental defaults, deferrals and waivers: There is already a wave of request by renters to provide some concessions in the rentals during the lockdown period. These requests vary from absolute waiver of rent to partial concession or deferral of rent payments. While the nexus is more pronounced and logical in the commercial rental market, the same is also being used by tenants to renegotiate in residential spaces especially in cases where people have lost their jobs or are working as freelancers in an industry which has come to a standstill in this lockdown.
- Contract terminations beginning to happen: We have already started witnessing tenants serving notices to terminate their Leave and License contracts driven by loss of job or drastic revision in salary resulting in reduction in disposable income in the near future. Some of these renters have made a decision to move back to their hometown for good in light of the ongoing situation.
- SLOWDOWN IN DEMAND: We expect a significant slowdown in incremental demand for rental apartments. This will be driven by the following key factors:
- Hiring freeze and job loss in Corporate India: In light of the economic impact of this pandemic, several companies have imposed a freeze on hiring. This would result in lesser inflow of new people migrating to a city. In addition, we expect significant job loss as companies try to recalibrate their operations in wake of the consequent economic debacle.
- Financial condition of startups: A significant chunk of employment in the recent years has been driven by well-funded startups. The lockdown has given a serious jolt to the Indian Startup ecosystem and we expect a significant curtailment in creation of job opportunities from this segment.
- Lesser inflow of expats: Given the origin and spread of the pandemic has been driven by international movement of people, we see curtailment of the same in the near term driven by fear of any recurrence. This would impact the inflow of expats into the country and would drive down demand and could significantly impact rentals especially in the luxury segment.
- REDUCTION IN RENTAL VALUES: We expect reduction in pricing of rental apartments driven by the slowdown in demand as highlighted above. We expect not only a revision in the base rentals for new contracts but also significantly lower escalations being built into the contracts which will keep the rentals subdued in the near term. We also expect to see revision in rental values of ongoing contracts as tenants may renegotiate their contract with the owners in light of salary cuts/job loss. We believe the owners will also be prudent and cautious as they wouldn’t want a termination of contract which could potentially result in elongated vacancy in such turbulent and uncertain times.
- HIGHER AND LONGER VACANCIES: The residential Rental market has been subdued for the last 12 months on account of economic slowdown prior to the outbreak of the pandemic itself. This had resulted in longer vacancy period as well as lower rental values. We expect this trend to get amplified due to the outbreak of the pandemic. The extent of impact will be driven by the time-period of the lockdown and the consequent pace of recovery.
- DOWNSCALING: One positive trend for the intermediaries in the segment would be that there would be significant movement on account of downscaling as people get acclimatized to the new realities in terms of the prospects of near-term disposal incomes and would want to pay commensurate rentals. We believe this will result in significant churn in the near term and surge in transactions.
- UPSCALING: Another interesting trend that we may witness is an upscaling that could happen wherein people would want to stay in a locality which provide them with a better ecosystem including better security and better social infrastructure which may come handy in case of such calamities.
- ‘WORK FROM HOME’ MAY BE HERE TO STAY: We believe that companies will get accustomed to WFH as an efficient and effective way of functioning for certain verticals and would evaluate the same as a permanent mode of operation. This would result in people opting for accommodations which would make this transition smoother. This may include movement into an apartment with an extra room which could be used for working from home.
- SOME UPTICK IN DEMAND FROM RETURNING NRIs: We would also witness some reverse inflow of Non-Resident Indians who may be facing a bleak outlook on account of salary cuts or job loss. This would result in lower supply of rental properties in the market as they may occupy their house which they would have rented earlier. Alternatively, it could result in incremental demand for rental apartments.
While it is difficult to gauge the eventual impact of this pandemic on the market and to ascertain which of the above trends will play a more dominating role, we are certain that this event will result in drastic changes in every sector including the Residential Rental market. It is fairly evident that the current pandemic will cause a drop in transaction volumes for a period of time. However, we are also certain that normalcy will resume and we will be back to pre-Covid level of activity. The key questions being how long would it take and under what new paradigms?