Coronavirus Crisis May Hit Commercial Real Estate More Than Expected, Says Anarock’s Anuj Puri

India’s real estate sector, already battered by muted sales and piling inventory, is likely to get hit worse than previously envisaged, not because of the domestic lockdown or economic slump, but a likely economic meltdown in the U.S.

That’s according to Anuj Puri, chairman and country head of Anarock Property Consultants. The sector, according to him, could see a repeat of what happened in 2009-11 after the global financial meltdown. “Every year, the U.S. corporates have taken more space in India than Indian corporates. The moment anything happen in the U.S. these guys are going to freeze and the moment they freeze, leasing activity for the calendar year 2020 is going to go down dramatically,” he told BloombergQuint.

The U.S. has now emerged as the new epicenter for Covid-19 after cases of infection in New York crossed the tally reported in China’s Hubei province, where the virus originated in December 2019. The world’s largest economy, according to Goldman Sachs, will shrink an annualised 34 percent in the second quarter compared with an earlier estimate of 24 percent as the pandemic hurts businesses. Unemployment will soar to 15 percent by mid-year, up from a previous forecast of 9 percent, economists led by Jan Hatzius wrote in a report.

“The pre-Covid predication was 42 million sq feet (office space). If everything gets better right now, we predict a 17 percent drop, which means it’s like to come down to 35 million sq feet,” Puri said. “But if it continues for longer and the U.S. economy does get hammered, it could go down to as much as 28 million sq feet.” This will lead to a larger availability of office spaces and a downward pressure on office rent, Puri said.

This comes at a time India’s real estate developers struggle to raise funds as non-bank lenders turned selective after a shock default by the IL&FS Group in September 2018 triggered a liquidity crisis. That, coupled with an economic slowdown, stalled a nascent recovery in the sector from the disruption caused by Prime Minister Narendra Modi’s cash ban and a stricter housing law.

Still, Puri is confident of surviving the crisis. “This is a story we have lived in 2009-10-11 so we know how severely this can be impacted with the U.S. economy meltdown,” he said.

A Silver Lining In Housing?

Sales in India’s residential sector dropped 42 percent year-on-year in the first quarter of 2020, according to Anarock. Residential sales in the top seven cities stood at 45,200 units during the period against 78,510 units a year ago. Sequentially, housing sales fell 24 percent. New launches, too, fell 42 percent annually, the report showed.

There, however, is a silver lining, Puri told BloombergQuint. “One, we are getting a lot of time from these guys on the (phone) calls. Second, our GCC office is saying because of the devaluation in rupee, there is a lot of interest because everything has become 10 percent cheaper. The Indian guys are saying that EMIs look more attractive now.”

Here are the other key highlights of what he said:

• People are looking to invest in hard assets after stock market selloff.
• Enquiries have increased but we don’t know how this will play out once lockdown ends.
• GCC diaspora is now saying that it may be the right time to buy a home in India because they may be pushed out of those countries to India.
• If job losses happen, demand in affordable housing will go away.
• Supply of affordable houses will also take a hit since labourers have migrated back to villages and construction material is difficult to obtain.
• Will take four-six months after lockdown for production cycle to come back to normal.
• Lower demand and lower supply should balance each other out.