Exploring War Fall-Out On Indian Realty - When Conflict Meets Concrete

If we consider India's last two most significant military engagements — the Indo-Pak war in 1971 and the Kargil war in 1999, we saw this process unfold in all the four critical real estate sectors: residential, commercial, retail, and hospitality

War rarely leaves anything untouched, especially not real estate. We may not necessarily be talking about decimated buildings - though those must be factored in within the actual conflict zones. Armed conflicts generally have a negative effect on economies, except if a country has reconfigured itself as a 'war economy'. Such economic reinvention happens only during protracted wars and comes with several human costs.

Wars also stall construction and dampen end-user and investor confidence. Aspiring homebuyers put decisions on hold. Retailers put a brake on their expansion plans, and tourists postpone their travel plans. Real estate markets adapt, pause, and then bounce back.

If we consider India's last two most significant military engagements — the Indo-Pak war in 1971 and the Kargil war in 1999, we saw this process unfold in all the four critical real estate sectors: residential, commercial, retail, and hospitality.

War - the 'Real' impact

War creates several economic effects and side-effects which impact the real estate market in different ways:

Reduced end-user and investor confidence - Homebuyers delay purchases, businesses delay office leases, and investors seek safer havens like gold (and, these days, cryptocurrencies)

Raw materials get scarce - The key inputs for construction - steel and cement - may be diverted to fortify the country's defence infrastructure, and/or see steep price hikes

Government spending pivots - Governments will spend more on its military and reduce spending on infrastructure and consumer real estate

Capital values may take a hit - While armed conflicts do not impact rentals much, housing capital values may reduce because of lower demand

1971 Indo-Pak war: Construction screeches to standstill

The 13-day conflict in December 1971 did a lot more than redraw India's borders — it brought the country's economy to a virtual standstill. There was a huge dip in GDP growth - from 5.4 per cent in FY1970 to 1 per cent in FY1972. Simultaneously, inflation spiked beyond 11 per cent and construction was largely restricted to military sites.

Impact on housing market

In the financial capital of Mumbai - then Bombay - the state government put an iron grip on cement and steel, which resulted in a 12 per cent reduction in the approval of housing projects. Thankfully, the rent control laws remained unyielding, so housing rental rates did not spike even though inflation raged out of control. Not surprisingly, property registrations in the city reduced by almost 10 per cent in 1971.

Impact on commercial real estate

There were no FDI inflows worth mentioning, the development of private office spaces came to a grinding halt. Locations like Mumbai's Fort area and Delhi's Connaught Place saw massive vacancy rates - however, office rentals did not sink because of the limited supply, and due to inflexible regulations.

Impact on retail real estate

Back in 1971, India's high-street retail scene was mostly unorganised and uncharted, but local shops in Old Delhi and Kolkata saw a significant drop in footfalls. According to available court records from 1971, shop rent disputes in Mumbai rose by 18 per cent due to increased stress among tenants.

Impact on hospitality real estate

Unsurprisingly, tourism in India was impacted by the war. From 2.02 million in 1970, Foreign Tourist Arrivals (FTAs) reduced to 1.96 million in 1971. In Delhi, hotel occupancy dropped to under 45 per cent and even the hospitality major of the day - the Indian Hotels Company - saw revenues drop in double-digits, especially in areas that were directly affected by the way - especially Srinagar.

Today - the costs of escalation

If the current conflict broadens, we should be prepared for certain ramifications:

Housing - Residential absorption in Delhi-NCR and other parts of north India may witness a short-term dip of between 5–10 per cent. Luxury housing buyers tend to delay purchases in periods of uncertainty. Demand for mid-income housing will be the first to recover once normalcy is restored. However, prices of cement and steel would remain elevated over the medium term unless the government intervenes.

Commercial real estate - If the conflict persists or widens, we can reasonably expect MNCs to put their entry/expansion plans into India on temporary hold. This would obviously impact absorption numbers, but long-term demand — most notably from the GCC, BFSI and IT sectors - will return and strengthen within 12 months or less.

Retail real estate - Larger malls have less to worry about because of long-term leases and also rent-waiver clauses. They can therefore weather such a storm more adroitly than high-street retail. We may see a drop in footfall and store launches being postponed. Nevertheless, India's consumption will overcome these odds quickly and Indian retailers have perfected the art of nimbleness during Covid-19 - expect highly imaginative promotions to draw the crowds back in.

Hospitality real estate - Naturally, Delhi, Kashmir, and other impacted regions are going to see a flurry of cancellations if the conflict persists or widens. We may see hotel occupancies drop by anywhere between 10-15 per cent in these areas. However, domestic leisure travel — which accounts for almost 90 per cent of room-nights — will not flounder and we can definitely expect a massive surge of 'victory tourism' such as was seen in Kargil once hostilities cease.

Prices and rentals

We do not expect any significant drop in housing capital values unless hostilities stretch longer than one fiscal year. Today’s market is dominated by large, listed and financially robust developers who do not carry excessive leverage. This gives them prolonged 'holding power', and the major banks also are well-capitalised. There may be a pause on price hikes, followed by a sharp hike in prices on account of higher construction costs next year.

The bottom line

If past wars and conflicts have taught us anything, it is this - they can temporarily slow down sentiment and freeze decisions, but they cannot break India's real estate market. In 1971, Mumbai (then Bombay) was deploying the satellite city Navi Mumbai even as the war raged on. In 1999, the demand for luxury homes continued unabated, the first malls threw open their doors, and revenge tourism plans were being charted even before the war ended.

We may see some short-term sluggishness in the market, but there is no question of an outright plunge. Much has changed since the bombs last flew at scale - the country's economy has strengthened considerably, its real estate sector has become more disciplined and regulated, and homebuyers showed their strongest side during what was expected to be the death-knell of the housing market - Covid-19.

We are good to go, for the short or the long haul.

(The author is Regional Director & Head – Research, ANAROCK Group)