F or a country struggling with economic growth, the year 2020 had been cautiously touted as a harbinger of hope. It was expected that the new year would finally break away from the gloomy downward trend, resolve its NBFC woes through various remedial measures announced, confront global headwinds and chart an upward growth trajectory, albeit at a much slower rate. The real estate sector, that has been chiefly dependent on the strong performance of the commercial space segment, was expected to observe an all-around growth as well, particularly in the residential segment with easing of the unsold inventory situation through initiatives such as the stressed realty projects fund.
These expectations, as of today, remain somewhat challenged by the outbreak of COVID-19, that emerged in Wuhan, China, and is spreading around the world. This has left businesses to deal with considerable revenue loss and disrupted supply chains, primarily on account of their dependence on China, the second-largest economy of the world and a prime trading nation.
While the impact is yet to take on an alarming situation in India, the fact that India has major trading ties with China, portends several implications for the real estate sector. Key construction material components such as steel and steel products, that see relatively short production in India compared with their demand, are projected to witness a price increase in the short term. This, in turn, is expected to increase the cost of construction, lowering the profit margins of real estate developers.
Additionally, most interior finishing materials such as carpets, acoustic panels, and fire alarm protection systems, are imported from China. With constraints arising out of the virus outbreak, there would be a resultant delay in materials reaching the project site, thereby leading to a cascading effect in terms of tenants deferring the space take up; and even go as far as suspending hiring of resources. With the anticipated growth of the office sector pegging the absorption figure close to 50 million sq. ft across markets in India this year, the outbreak of COVID 19 comes as a major setback. This would lead to a slowdown in the market, as most companies have strategized their business plans based on new hiring and the premise of office space being ready in 2020.
At this point, we anticipate that all sectors of the construction industry will have a marginal slowdown in terms of timelines anywhere between 30 days for a fit-out of space to 6 months in construction projects.
Having said that, if manufacturing doesn’t pick up within the next couple of weeks in China, the supply chain is bound to be affected.
The construction industry is heavily dependent on China for all equipment/ materials and any delay will impact deliveries of the base buildings by the developers; in turn, space being ready for occupancy by corporates for their operations. The next 4 weeks are extremely crucial, as it will determine the anticipated delays in supply chain management and the overall impact on the industry and the economy of the country. From India’s perspective, if COVID 19 continues to spread, the labour force is bound to be reluctant to come back to work. Even on the presumption that workers are willing to work, the cost of ensuring the safety of the workers will increase over the next 2-3 quarters.