Real estate sector will see new trends emerge in 2021

Rajani Sinha | Updated on January 20, 2021

Buyers opting for bigger houses, organised warehousing recording healthy growth, and launch of 2-3 more REITs are some of them

The real estate sector, which was battered by the pandemic, has started finding its feet. There have been definite signals of rebound since the third quarter of 2020. Residential sales have reached close to pre-Covid levels by the end of the year, buoyed by a combination of factors like the pent-up demand, low interest rate, increased household savings and State government support like stamp duty cut in Maharashtra. Even amidst high adoption of Work From Home (WFH) by corporates, office transactions also witnessed a healthy bounce-back in the last quarter of 2020.

With a complete overhaul in the economy and probably some permanent changes in the way people live and work, the real estate sector in India will see the emergence of some new trends in 2021.

A big chunk, around 80 per cent of the real estate sector, is accounted for by the residential segment and this segment has been quick to bounce back from the Covid crisis. Growth in this segment is likely to continue in 2021 as housing prices have corrected and interest rates are likely to remain low in the medium term.

We saw the average house size reducing from 1,500 sq.ft in 2010 to 1,345 sq.ft in 2020 (top eight cities in India), as developers moved to more compact houses. However, post pandemic, this trend may reverse with buyers opting for bigger houses to accommodate their new lifestyle. We already saw signs of this trend in 2020.

On the supply side, with the credit crunch faced by the real estate sector in the last few years, many housing projects got stuck. The buyers, having burnt their fingers in the past, will get even more risk averse now with the pandemic-induced uncertainties. Hence, the reputed developers with established brands will find it easier to come out of this crisis, whereas the others will find it more challenging.

Housing prices that were already under downward pressure in the last few years, fell further during the Covid crisis. In the last 2-3 years, residential prices have fallen up to 15-16 per cent in the top eight cities. While prices are likely to remain muted in 2021, further significant fall in prices from the current levels is unlikely.

After a record level of 60 million sq.ft in 2019, office transactions fell sharply in 2020 due to the pandemic-induced uncertainties and WFH. Going forward, even as things return to normalcy, we feel corporates will experiment with hybrid work models. So, even while they give more flexibility to the employees to work from anywhere, that may not necessarily result in lower office demand.

Some corporates may opt for dispersed office locations to facilitate less travelling by the employees. Space per desk that had reduced from average of 120 sq.ft to 80 sq.ft in the last five years, could see a reversal in trend with occupiers opting for more dispersed seating to take social distancing into account. This will provide some fillip to overall office real estate demand.

Co-working, which emerged as a strong trend in the last few years, got severely hit by the Covid crisis. This segment received a big jolt as start-ups and small entrepreneurs gave up their office seats during the pandemic. Going forward, as the business uncertainties linger, the co-working segment will emerge strong given the flexibility offered by them. Even among the co-working operators, those having a large share of enterprise clients (bigger corporates) will do better than those dependent on start-ups and small entrepreneurs.

Office rentals fell up to 7 per cent in the top eight cities in 2020. Even with demand improving, office rentals may remain around the current levels in 2021, as corporates focus on containing cost.

Organised warehousing, which is still very new to India, is likely to record healthy growth in 2021, buoyed by the increased demand from e-commerce players. In-city warehousing growth will be expedited as people move to online shopping for their daily and perishable requirements.

Data centres had already started seeing rapid growth, and they are expected to see further sharp growth as some of the digital adoption that we saw in 2020 will become permanent. India has an estimated data centre capacity of 400-450 MW, with cloud services driving the current boom. Demand for colocation facilities could grow at an estimated 20 per cent annually for the next five years.

India witnessed its second REIT (Real Estate Investment Trust) launch in June 2020, while the first REIT was listed in 2019. Both the REITs have enticed strong interest from investors, and this is despite all the noise around WFH and uncertainties about office demand during the pandemic. The success of the first two REITs in India has encouraged financial institutions and developers to expedite the process of listing through REIT. There could be launch of at least 2-3 more REITs in India in 2021.

Like many other sectors, real estate has adjusted to the pandemic and the new normal. While the battered sector has started recovering from the crisis, uncertainties continue to linger. Going forward, the recovery of the sector will be directly linked to the Covid situation and the economic recovery. 2021 will be a year of cautious optimism for most sectors, including real estate.

The writer is Chief Economist and Head of Research, Knight Frank India.

Published on January 20, 2021

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