Analysts turn cautious on realty

Nifty Realty index plunged 7.5% on Monday, and has fallen 13% in a month

Even before the market crash on Monday wherein the benchmark realty index was among top sectoral losers, analysts had started turning cautious on the sector. The second wave of Covid-19 and the ensuing curbs have hit the real estate segment again, especially commercial real estate. Experts say there is still uncertainty on when business will revert to usual.

Occupiers, according to JLL, a leading real estate consulting firm, continue to adopt a cautious approach, reassessing their real estate portfolios and longterm commitments. The leasing momentum in the coming quarters, they believe, will depend on the time taken to contain Covid cases.

“Increasing fears of a spike in Covid cases in the second half of March further pushed the occupiers to press pause again and postpone their real estate decisions,” said Samantak Das, chief economist and head of research and REIS, India at JLL.

Investors, too, have steered clear of realty stocks. While the Nifty Realty index fell 7.5 per cent on Monday (individual stocks down 3.8 - 11.5 per cent), it had slipped over 5 per cent in the past month (from March 12 till last Friday), compared with a 1.5 per cent fall in the Nifty50 index. Between November 2020 and early March the index was up 60 per cent.

Long road home

While commercial leasing did gain some momentum in the December quarter, experts say it is yet to return to pre-covid levels. Many IT/ITES companies have again extended the work from home (WFH) option to their employees (many up to October 2021) and will decide on the future, depending on how the pandemic situation plays out. Analysts at Jefferies believe the return to normalcy for the office and malls business has now been pushed by around two quarters to the second half of financial year 2021-22 (H2FY22).

“The IT/ITES sector is among the prime drivers of overall leasing activity in the top cities. While many large companies renewed their office lease last year despite rising Covid-19 cases, there were others (such as start-ups) who cancelled theirs,” said Anuj Puri, chairman, ANAROCK Property Consultants. Now, with rising cases and the anticipation of broader lockdowns in some of the top cities, commercial leasing will walk a tightrope in 2021, adds Puri.

Strong demand for office space in 2018 and 2019 and the expectation of similar demand in 2020 (pre-covid) had led developers to plan around 119 million square feet of new supply across the top seven markets in India. With demand now looking weak, there is a risk that a large part of this supply may remain unabsorbed and negatively impact rentals.

Meanwhile, most mall developers had offered a 50 per cent rental waiver in FY21. According to the agreements with most retailers (barring multiplexes), rentals were to return to the pre-covid minimum guarantee levels from the June quarter (Q1) of FY22. Analysts say this may be renegotiated, given the recent developments.

Pre-leased upcoming supply and near-term deals in the office leasing pipeline, according to ICICI Securities, may get deferred by one or two quarters depending on how the situation evolves. That apart, investors are also concerned that new supply will put pressure on rentals.

“Rising interest rates negatively impact the valuation of yield assets like REITS at least over the immediate term. We don’t rule out further nearterm weakness if interest rates rise and office spaces report increased vacancies,” wrote Puneet Gulati and Akshay Malhotra of HSBC in a coauthored note, dated April 9.

Investment strategy

Analysts at ICICI Securities expect consolidation across the industry with market share gains for larger incumbents across asset classes. Balancesheet deleveraging, they feel, will continue to be a focus for all listed developers.

Unlike commercial real estate, residential players are seen better placed. Weak real estate prices, relatively benign home loan rates, and WFH are seen as key drivers of residential real estate demand.

“Real estate was one of the sectors impacted significantly by Covid/lockdown in FY21. Continued prevalence of WFH has negatively impacted office space requirement and we expect this trend to continue in FY22 as well. That said, residential real estate has made a strong comeback with the need for larger homes,” says Adhidev Chattopadhyay, an analyst tracking the sector at ICICI Securities.

G Chokkalingam, founder and chief investment officer at Equinomics Research, had a similar view. “Among the lot, Oberoi Realty, Sobha, Godrej Properties are relatively better off, but the decision not to extend stamp duty waiver on property registration in Maharashtra may be a short-term dampener. Resurgence of Covid will impact commercial players like DLF, Embassy Office Parks, and Brookfield India Real Estate Trust,” he says.