ICRA: Covid-19 to pose significant challenges to the real estate sector

Retail and residential segments to bear the brunt of near-term impact whereas structural changes are likely in the long term in the office segment

Covid-19 outbreak poses significant challenges to the overall economy and the real estate sector will be among those sectors of the economy to see very high impact. Nonetheless, there would be variations across the different segments – Residential, Retail and Office leasing - in terms of the timeframe over which these risk factors play out and the extent of cash flow disruption.

The Indian residential real estate sector has already been under stress for a prolonged period due to weak affordability, subdued demand conditions, a high inventory overhang and more recently, a liquidity crisis. Now, with the coronavirus outbreak, there has been a double whammy on the sector. Demand risks are likely to increase, resulting in a substantial decline in new sales. Committed collections receivable from already booked sales are also likely to get impacted, given that mile-stone based payments may get deferred and some buyers may delay payments on account of economic uncertainties. Projects catering to the business, NRI and investment communities, where purchases tend to be largely self-funded, may witness a more significant disruption in collections. Less disruption would be expected in the home loan funded segment, although in some cases, pay cuts may lead to re-evaluation of buyer credit profile by HFCs, thus impacting incremental disbursements.

On the supply side, new launches are likely to get deferred, not only due to operating issues, but also due to increasing economic uncertainties and likely moderation in developer inflows. For ongoing projects, execution has been getting hampered due to reduced labour force presence and raw material supply chain disruptions attributable to lock-downs on non-essential services and contagion fears. Thus, overall project development timelines and costs are likely to increase, though some cost savings on account of the prevailing decline in commodity prices are likely. Notably though, RERA guidelines provide for a one-year extension in project execution timelines, in case of events beyond promoter control. Thus, regulatory risks are reduced in the case of a short-term disruption.

Overall project cash flows are expected to suffer from the dual impact of slower collections and higher outflows on account of cost & time overruns, with the extent of impact being largely determined by the duration of the disruption and developer’s ability to absorb shocks. Developers with adequate balance sheet strength, liquidity, and a well-diversified project portfolio are likely to be better-positioned to sustain through this crisis.

The retail real estate segment is directly impacted due to ongoing nationwide lockdown and resultant closure of malls. As per the latest developments, the closure has been extended till May 03, 2020. Rental expenses form a sizeable share of 12-16% of revenues for retailers, therefore, all tenants are likely to negotiate for waiver/rebate of the rentals for the closure period. Even after resumption of operations, the footfalls are expected to be muted, therefore, the financial position of the tenants will continue to be stressed. Resultantly, the rental income of the mall operators, which also comprises a portion of the revenue share, is expected to be significantly impacted.

As per the lease agreements, though the force majeure (FM) clauses differ across properties and tenants, as per ICRA analysis, the clauses appear to be in favour of the mall developers as they cover only structural impact on the mall property due to force majeure reasons.

As per ICRA analysis, impact on revenue, profitability, liquidity and coverage indicators will be high to severe in case the lockdown is extended beyond May 2020. Further, debt service coverage indicators of properties with high dependence on revenue share income will be severely impacted even in the current scenario of closure till May 03, 2020. Nevertheless, healthy liquidity profile and strong parentage will differentiate the credit risk profiles. ICRA’s rated portfolio has more than 40% entities with comfortable liquidity. Also, around one third of the portfolio has strong parentage.

The office leasing segment will be relatively less impacted in the near term by Covid-19 related business disruptions as compared to other segments. The rental inflows from the larger anchor tenants are expected to be less prone to delays and as per feedback from the landlords, many of the larger tenants have already paid the rents for the months of April. However, there could be requests for waiver or deferment of rents from smaller tenants. The extent of the lockdown duration will be a key monitorable to estimate the cash flow impact in the near term. Fresh leasing transactions in the near term are likely to be delayed and rent commencement from newly completed properties are also likely to be pushed back as tenants may delay starting operations in the uncertain environment.

In the longer term, the segment is vulnerable to structural changes arising from the economic disruption as well as evolving preferences of tenants who will take into account business continuity aspects into real estate resource planning. The overall impact on global economy may constrain the expansion plans of large multinational corporations, who are among the largest tenants in India’s office parks. More widespread adoption of work from home practices may also curb the demand for office space to some extent. These risks will be partly offset by the competitive advantages enjoyed by India as a hub for business process and IT support service segment which may continue to support the incremental demand for office space going forward.

Overall, the three-month moratorium provided by RBI on debt obligations is, however, expected to provide some relief for all segments. It must be noted that large number of developers have indicated inclination for opting the moratorium for debt repayments. Some of the entities have opted the same due to possible challenges in cash flows while some others have intention of preserving liquidity. Going forward, clarity on settlement of interest accrued during the moratorium period will be critical. Bullet repayment requirement of the accrued interest may put acute pressure on cash flows of the entities.

PM kick-starts ₹14,258-cr Road Projects in Bihar

Prime Minister, Narendra Modi, has laid the foundation stones of nine highway projects in Bihar through video conferencing. The total road length of these projects is about 350-km, involving an investment of Read More ...

NHAI plans to lay ₹1,200-cr four-lane Road in Tamil Nadu

The National Highways Authority of India (NHAI) is planning to build a four-lane road from Kurumbapalayam in Coimbatore district to Sathyamangalam in the Erode district, at an investment of ₹1,200 crore. The existing Read More ...

AAI to launch ₹995-cr Project in Arunachal Pradesh

The Union Ministry of Development of North Eastern Region informed that the Airports Authority of India is set to inaugurate a greenfield airport in Hollongi, Arunachal Pradesh, at an estimated cost of ₹995 crore Read More ...

L&T Realty forays into Commercial Market of Chennai

To make the most out of the emerging business avenues in the commercial real estate segment in the South, Larsen & Toubro Realty has planned to build its maiden commercial project in Chennai. The 6.85 million sq ft Read More ...

MoRTH approves ₹1,034-cr for Road upgrades in Bihar

Union transport minister has approved funds of ₹1,034 crore for repair and maintenance of two National Highways in Bihar and has issued orders to prepare the detailed project reports (DPRs) for five other projects Read More ...

Assam to get new Flyover at Maligaon Chariali, Guwahati

Assam state government has announced the construction of a four km long new flyover in Guwahati involving an investment of ₹321 crore 41 lakh. The State Minister, Himanta Biswa Sarma, informed that the flyover will Read More ...

Prestige Group announces the launch of Realty Project in Bengaluru

Prestige Group has announced the launch of its third premium residential property - Prestige Waterford at Whitefield in Bengaluru. Prestige Group has achieved a key milestone with the virtual launch of three Prestige Read More ...

Tata Projects emerges as Lowest Bidder for ₹889-cr Parliament Building Contract

Tata Projects has emerged as the lowest (L1) bidder for the construction of the new Parliament building in New Delhi involving an estimated investment of ₹889 crore. Out of the seven companies, which placed their technical Read More ...

CCEA approves ₹5,617-cr Orbital Rail Corridor Project in Haryana

The Cabinet Committee on Economic Affairs, headed by the PM, has approved the 121-km long Haryana Orbital Rail Corridor project connecting Palwal to Sonipat at an investment of ₹5,617 crore. The project, which is to Read More ...

NCC emerges as Lowest Bidder for Patna Metro Contract

The Delhi Metro Rail Corporation Limited (DMRC) opened the financial bids of the civil contract package PC-01 which was floated for the construction of 6.107 km stretch between Malahi Pakri – New ISBT section of the corridor Read More ...

IRB Infra inks pact with NHAI for ₹1,755-cr Vadodara-Mumbai Expressway

IRB Infrastructure Developers has entered into a pact with NHAI for executing a stretch of Vadodara-Mumbai Expressway in Gujarat at a cost of ₹1,755 crore for a project under the Bharatmala Pariyojna Phase 1. VM7 Read More ...

Tehri Lake to get over 230-km long Ring Road in Uttarakhand

Uttarakhand government has planned to build an over 230-km long ring road along Tehri Lake to bolster tourism in the rural heartland of the state which has a huge potential of becoming the future international tourism Read More ...

BMRCL floats PMC bids for 55-km long Metro Line

Bangalore Metro Rail Corporation (BMRCL) has invited bids to appoint a Project Management Consultant (PMC) for carrying out the civil construction works of Bangalore Metro's 55 km Line-5 (Blue Line) which will connect Read More ...

Survey work for Kozhikode-Wayanad Tunnel Road begins

The Kerala Government has initiated the survey works for the longest tunnel road in the state, connecting Kozhikode and Wayanad districts at an investment of ₹658 crore and the project is being financed through Read More ...

NHAI hastens ₹7,400-cr Mysuru-Bengaluru Expressway

The 118-km and ten-lane expressway between Mysuru and Bengaluru of ₹7400 crore has been fast-tracked by the NHAI and it is likely to be completed by 2022. NHAI Superintendent Engineer, Sridhar, informed that after Read More ...

thyssenkrupp inaugurates new Engineering Office in Pune

The thyssenkrupp group has inaugurated its new engineering office in Pune, India. It was inaugurated by Dr Sami Pelkonen, CEO thyssenkrupp Business Unit Chemical & Process Technologies Germany (tkIS- CPT) and P D Samudra Read More ...

New Building Material & Construction World

New Building Material & Construction World
MGS Architecture

Modern Green Structures & Architecture

Modern Green Structures & Architecture

Lifting & Specialized Transport

Lifting & Specialized Transport

Indian Infrastructure & Tenders Week

Indian Infrastructure & Tenders Week