As we approach the halfway mark of 2020, the dark cloud of COVID-19 looms over businesses across the country. This persistent outbreak’s most notable victim is the commercial real estate sector, which has not only suffocated cash flow impacting the ability of businesses to pay rents but also severely hindered the supply for construction and repairs across the country.
This, coupled with the fear of a global recession, has left the Indian real estate sector in a climate of uncertainty, as investors grapple with the new environment and reassess their investment strategy. In recent years, commercial real estate has emerged as the favored investment option by institutional investors, owing to their higher per annum yield.
According to data released by ANAROCK, between 2015 and the third quarter of 2019 the Indian real estate sector attracted approximately USD 14 billion of foreign private equity investment. These statistics, combined with the success of Embassy Office Park REIT’s IPO in March 2019, accentuated the attractiveness of the opportunities in the sector.
Despite the growth, owing to the present precariousness of a global meltdown and the uncertainty of the lockdown restrictions, businesses that have rented office space are finding it strenuous to make rent payments. Multiple global QSR chains have even written to landlords requesting a rent waiver on account of the burdensome yet imperative government-mandated lockdown. In such circumstances, while many tenants may elect to invoke the “force majeure” clauses in their contract to avoid paying rents, the applicability of the aforementioned especially in the present situation remains questionable.
When a similar question arose during the SARS epidemic in 2003, Hong Kong courts did not permit tenants to wriggle out of their obligations of payment in lease agreements. The Indian Judiciary has taken a similar stance during this COVID-19 pandemic, with the Supreme Court, after much consideration, having declined a PIL for seeking relief from payment of office rent by advocates who have suffered financial losses.
Given the overall economic picture, termination of leases may not be a commercially feasible option for either the landlord or tenant in the foreseeable future, the only tangible solution may be to sit across the table (virtually, of course!) and renegotiate rental terms. In any event, since the landlords would suffer a marked loss of revenue, commercial real estate would be one of the most brutally affected sectors, even from a credit rating perspective.
Taking cognizance of the challenges being faced, both the RBI and the Central Government have introduced relief measures to counteract the effects of the outbreak. The RBI has announced a 1-year extension for repayment of loans availed by the commercial real estate projects which are delayed, for reasons beyond the control of promoters.
Coupled with this, the Central Government’s announcement of extending the deadline for completion of Real Estate Projects by treating the outbreak as a force majeure event under RERA would be a welcome respite for the sector. Moreover, the relief measures for NBFCs in the form of liquidity boosters should also provide a helping hand as it would provide a much-needed credit line to the cash-starved sector.
In terms of the short term impact of COVID-19 on demand, ANAROCK has estimated that absorption of office spaces is likely to dip by 15-30% in 2020. Also as per recent statistics released by JLL India, institutional investments into the real estate sector have reduced by 58 percent in the quarter ending March 2020, from a year ago.
While this fall reflects global trends, the impact of COVID-19 has made just a chink in the otherwise solid armor of this sector, and the same may not impact its medium to long term growth. It remains to be seen whether investors with long term investment horizons mixed with dry powder at their disposal, take advantage of this temporary downtrend, and double their bets on the otherwise sturdy and reliable commercial real estate sector.
As reported by NDTV, Stephen Schwarzman, chief executive and co-founder of Blackstone, during his recent visit to India, stated that the fund is bullish on India. From a long-term perspective – if asked the same question today, it would be a good bet that his sentiment would remain largely unaffected, despite COVID-19 having well and truly hit home.
All things being equal, if commercial real estate players play their cards well in this game of poker, letting go of short term gains, the COVID-19 outbreak, may merely end up being a case of seasonal flu resulting in a temporary slowdown, rather than a fatal blow to the sector.
Contributed by: Anuj Bhasme, Partner; Avichal Mathur, Senior Associate; Rutvi Shrimankar, Associate
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