In the words of Sequoia Capital, one of the world’s foremost venture capital firms, Coronavirus is the ‘Black Swan of 2020’. As black swans are rare, so is this deadly virus. Spreading at an alarming rate, COVID-19 has pushed global economies, including the real estate sectors across countries in a forceful defensive stance. 99acres.com examines the ripple effects of this virus in detail.
Honestly, the world did not anticipate a World Health Organisation (WHO) declared pandemic in Coronavirus infection. Started in Wuhan, China, the virus is spreading like wildfire and creating panic across the world. Let alone real estate; the world has to brace for an unprecedented impact (mainly negative) on every sector of the global economy. At a tally of 18,59,011 confirmed cases and a death toll of over 1,14,979 people (as on April 13, 2020), COVID-19 is affecting every aspect of human life. Although the direct impact on the real estate sector across the globe is still being measured, the predictions are discouraging due to the intertwined nature of the global economic supply chain.
In an exclusive interaction with 99acres.com, Binitha Dalal, Head of Fund Raising, Rustomjee Group, talks about the Impact of COVID-19 on global and Indian real estate market.
Let us analyse the COVID-19 impact on the global economy, especially real estate. China and the real estate connection China has been a manufacturing and construction giant for many years now. COVID-19, the flu-like epidemic which originated from Wuhan, has directly affected the construction activities in China. In recent months, Japanese earthmoving equipment manufacturers have experienced a visible dip in the use of its machines in the construction activities in China. The extended lunar holidays and official advice of staying at home have almost halted the construction and allied activities in China. The major allied industries helping the construction and real estate across the world are iron ore and steel industry. To check the spread of the virus, China is officially closing two-third of its production lines. The lockdown of fourteen provinces, including the manufacturing hub of Hubei, where Wuhan is located, will further hit the supply of essential construction material. The scale of impact can be gauged from the fact that the locked-down regions constitute 90 percent of China’s copper smelting industry, 60 percent of steel manufacturing, and 40 percent of the coal output. Global upheaval The devastating downward spiral of Dow jones and increasing list of travel-banned countries have contributed to a plummeting US economy. Being called a ‘Covid-19 recession’, the economic impact is estimated to erode 0.7 percent of the US GDP over the next quarter. That too if the virus is contained (or at least tamed) in the next three months. Even USA’s close neighbour Canada is heading towards a recession and COVID-19 (coupled with plunging oil prices) is a big culprit here. Special monetary packages to the tune of billions of dollars are adding burden to the ailing economy. In fact, a Covid-19 induced reduced economic activity is predicted to be affecting the housing market of Australia as well. Rising unemployment and delayed building approvals indicate a slump in the construction sector. In addition to this, the whole of Europe is severely hit by the deadly virus. The ever-increasing tally of infections has virtually pushed Italy and Spain into a forced countrywide shutdown. Already hit by recessionary economic activity, Italy is badly hit by COVID-19 infections. It reported almost a quarter of total new cases in the whole of Europe. Spain is also down with over 5,200 cases. On the eastern front, though Singapore and Hong Kong are nearer to the mainland China, their preemptive mechanism and swift disaster response has saved them from a catastrophe. Overall, the economic cost of COVID-19 infection is still being measured, but the calamity will cost the world economy in millions of dollars, and more importantly, a precious human capital. The impact back home Uncertainty is not good for development. The tide of speculations surrounding possible ill effects of the COVID-19 spread is delaying investment decisions, especially coming from the eastern countries. According to a report by Colliers Research, the decisions over commercial real estate acquisition are expected to be delayed due to coronavirus scare, especially by the occupiers who depend on overseas clearances from Asia. The impact is primarily indirect and can be gauged from the following points -
Almost 28 percent of the total investment in Indian real estate came from Singapore, Hong Kong, and China in 2019. In fact, the United Nations (UN) is predicting that India is at risk of facing an immediate trade loss of approximately Rs 2,510 crore.
As the supply chains from China will remain constrained, finding newer markets for the supply and even achieving self-sufficiency will take time and hence, India might face reduced economic activity.
Commercial real estate market will be more impacted as it is a slow mover. If the virus keeps impacting the economic supply chains for longer terms than expected, the commercial investment decisions may take a backseat.
A flight of capital can be expected as the investors would tilt towards a more stable bond market for investment.
Financial markets are also sensitive to the spread, and the recent crash of the Indian stock market is a sign of growing anticipation of further decline in investor’s sentiment.
As exports from China will decline, the cost advantage on account of cheaper supply from China will take a hit and would directly affect the profit margins of the real estate developers.
Tourism is one of the worst affected areas, and the ongoing travel bans have hit the hospitality industry and the earning potential of businesses dependent on tourism across India.
Expressing his opinion over the possible impact of the outbreak, Samantak Das, Executive Director and Head of Research, REIS, JLL, says, “The COVID-19 situation remains volatile, and uncertainty still looms on the possible economic impact of the outbreak. Global supply chains across domains will be disrupted in the short-term. We are already experiencing a slump in the hospitality industry due to flight cancellations. Moreover, the plunge is already being reflected in the delayed business decisions by developers to lease. While the commercial sector has remained on a strong foothold, investors will adopt a wait-and-watch approach in the near future.” Measures taken by Governments across the world to provide relief to the real estate sector As the Coronavirus induced fear and crisis has engulfed the world as a whole, the International Monetary Fund has indicated that the world has already entered into recession. However, the governments' world over are taking measures to cope with the situation and announcing relief measures viz-
To ensure capital flows and liquidity availability in times of crisis, the Australian Government has reduced the benchmark Repo rate. It has also created a special funding facility to the tune of AUD 90 billion to help the ailing economy.
The French government has agreed to consider the Coronavirus epidemic a 'Force Majeure'. It clarified that no penalties would be levied on the contractors or developers for any delays attributed to the deadly pandemic.
In the United States of America, though the building and construction have been categorised as 'non-essential' services and most of the construction activities have stopped, the Congress is mulling a special financial package (due for a vote). The package is expected to help construction workers and will provide relief to federally-funded projects.
In response to the Coronavirus-induced crisis, the Government of Canada will provide $27 billion direct support to Canadian workers (including construction labourers). Some states such as Ontario have also included the building and construction into essential services list. Construction Association of Canada has also released a detailed safety guideline for construction workers amid Covid-19 pandemic.
The Singapore Government has made special provisions to help the affected construction industry and labourers. It has allowed a refund on account of Man Year Entitlement (MYE) for construction companies starting April 1, 2020. They have also allowed the foreign construction workers to change an employer midway if they face hardships with the current employer.
Germany, which is also hit by the Covid-19 crisis, has readied the largest ever (Euro 400 billion) welfare package for the country, especially targeting the blue-collar working population. The government has also pledged to take over the wages for employees and compensate for the lost working hours due to Corona crisis.
The United Arab Emirates (UAE), which has been a construction hotspot for years now, has also rolled out a special package for small and medium enterprises and construction industry. The government has released $27 billion stimulus to aid the economy hit by Covid-19 crisis.
The International Monetary Fund (IMF) and United Nations (UN) have urged the developed countries to put on hold the debt payment from the poorest of countries so that they can effectively fight the COVID-19 crisis.
The World Bank has pledged $14 billion aid package for the countries around the world to fight the Coronavirus menace. It is in addition to the monetary packages announced by the IMF for countries such as Tanzania, Pakistan and Madagascar. To fight the Coronavirus crisis, the World Bank has also released $1 billion in aid for India.
The Resilient world If history is any indication, the world is bound to recover sooner than later. Every sphere of the economy, including the real estate sector, will face constraints such as reduced demand and delayed business decisions, but it will recover eventually. Terming the calamity a challenge as well as an opportunity to evolve, Avneesh Sood, Director, Eros Group, says,” The solid fundamentals of the Indian real estate segment are helping it withstand global pressure, and the impact is expected to be limited to the high-end luxury market. Despite the recent temporary shutdown, we are expecting a limited impact on the segment. Also, outsourcing to the European Union (EU) and the United States (US) businesses from India may increase, especially when China faces a loss of trust. The industrial and logistics sector too, is expected to grow. Imports from China have slowed down across the world, creating an opportunity for India. The future depends on how India reacts to the global epidemic and how effectively we contain it from spreading further.” Conclusively, in the words of Tim Cook, CEO, Apple, the strategy to deal with COVID-19 menace should be to reduce human density and limit social gatherings. The human race is not new to epidemics, and every challenge is an opportunity for the human race to come out stronger. The primary problem in front of the governments across the world remains to check the spread and endeavour towards developing a vaccine aggressively. Though the real estate sector will be affected, Government actions to contain the virus and active citizen engagement are expected to boost the housing demand by the second half of the year.
Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. 99acres does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.