Coronavirus crisis shakes up realty landscape sharply, housing demand to remain muted

May 16, 2020 1:51 PM

The Coronavirus crisis is impacting the Indian economy as well as the realty sector. However, multiple measures may ensure all stay on their feet while combating the crisis.

Coronavirus crisis, Indian economy, real estate sector, covid-19, homebuyers, lockdown, property prices , GDP growthEven after the lockdown ends, the industry’s bounce back is bound to be impacted since migrant labour may no longer be available soon.

A century after the Spanish Flu (1918-20) wrecked economies globally, the COVID-19 pandemic is causing a rerun of the earlier scenario. However, the current devastation has spread faster due to widespread global travel. The economic reverberations of the coronavirus crisis are, therefore, being felt across sectors.

An already-wobbly Indian economy is expected to bear the brunt for the next two quarters, if not more. This is quite natural, given that the current lockdown is the world’s most significant shutdown ever. With factories, logistics, transport, education, entertainment and a slew of other verticals under lockdown, India is estimated to have suffered a GDP loss of around Eight Trillion during the first three weeks of the lockdown. The lockdown extension will further cause commensurate damage.

Consequences of COVID-19

As a result, lower GDP growth is anticipated for the upcoming quarters. The International Monetary Fund estimates India’s economy will contract, growing by 1.9% only for fiscal 2020-21. On the other hand, the World Bank estimates that India’s growth will be even lower at 1.5%. But private analysts believe the country could register zero growth. Whatever the actual numbers in the coming year, it may be noted that if COVID-19 transmission soars and the nationwide lockdown is extended yet again, the adverse economic impact could rise. Nevertheless, one is hopeful that the latest IMF forecast comes true – indicating India will remain among the few major economies to grow.

Meanwhile, in the past few years, the realty sector has been battered by an ongoing economic slowdown, liquidity issues, the NBFC crisis, as well as the compliance costs of policy initiatives and reforms (such as demonetization and GST). All of these have affected prices even when there was lacklustre demand, leading to higher unsold inventories Pan-India.

Against this backdrop, Coronavirus crisis has shaken up the realty landscape sharply. On the supply side, multiple issues will arise. Due to supply chain disruptions of key materials such as cement, steel and allied items, prices could be volatile. In turn, these could inflate the price points for homebuyers, further depressing residential sales.

Similarly, a short supply of raw materials can trigger greater delays in construction activities and project completion, exacerbating an already bad situation and creating a vicious cycle of sorts. Such conditions can lead to an estimated 30% loss of jobs, according to an April 2020 report from KPMG – Potential impact of COVID-19 on the Indian economy.

On the demand side, lockdown restrictions will mean lower residential sales. Developers and property consultants are already reporting that calls and queries from prospective customers have dipped sharply. In turn, it has resulted in negligible footfalls even in places where lockdown restrictions aren’t stringent. Taking such factors into account, the traditional fence-sitting homebuyers may continue staying in a wait-and-watch mode.

Not surprisingly, housing demand will remain muted, coupled with a major decline in new project announcements. The launch of REITs (Real Estate Investment Trusts) – earlier scheduled for a listing this year – could most likely be postponed, exerting further pressure on liquidity for developers.

Considering the present conditions, fresh equity investments, whether National or International, are likely to stay subdued. Nonetheless, for institutional investors seeking value purchases, this could be one of the best times to buy because of the depressed property prices. The risk of investment values dropping substantially is relatively low, especially since a black swan event such as COVID-19 has driven property prices to record lows.

Adapting to the New Normal

But it needs to be clarified that the outlook isn’t all doom and gloom for significant economies such as India and China. In its latest report (‘The COVID-19 Shock to Developing Countries), the UNCTAD has stated that these two nations would be least exposed to a recession.

Whatever the economic perspective, a more practical view is necessary for industries at large. As per medical analysts, life across the world will not return to normal until a vaccine is in place to protect people against COVID-19. Instead, a new normal of social distancing and wearing masks may emerge worldwide – in the short term at least. Such measures will be beneficial for the realty and construction industries too since their workers tend to operate in proximity.

For India Inc., a new normal will be adopted for surviving and thriving in the post-COVID-19 phase. Some ways in which the business landscape evolves will comprise an emphasis on localization; putting digital systems in place; making cash the king in running businesses; adopting variable-cost models; ensuring resilience in supply chains and emphasizing agility.

These measures will benefit realty players too. Some elaboration should be helpful. As is clear over the past few weeks, the suspension of interstate logistics and transport has severely affected realty due to supply disruptions. Even after the lockdown ends, the industry’s bounce back is bound to be impacted since migrant labour may no longer be available soon. In such situations, if an industry localizes supplies as well as labour, wherever and whenever possible, the impact on the business will be comparatively less pronounced.

Likewise, greater reliance on digital can ensure that purchase orders and other transactions happen unhindered even when traditional payment or purchase modes stand suspended temporarily. Next, cash being king has to be perceived from a macro perspective. Here, the allusion is not to conduct transactions in cash – digital can continue being the primary medium. Instead, it denotes that companies should avoid an overreliance on debt. During any crisis, including the ongoing, companies with heavy debts are likely to find the going tougher. Conversely, companies with robust cash reserves will be better prepared to continue standing on their feet throughout the crisis.

In the same way, a variable-cost model will allow developers to sail through more smoothly under challenging times. Then resilient supply chains could help developers continue receiving minimal stocks despite constraints rather than being left without any supplies at all. This is possible via multistate vendors, including local ones. Finally, agility could help companies customize actions as per the requirements of the hour.

In the interim, the Centre, States and Regulatory Authorities could announce supportive steps that help both buyers and builders, as well as other industry stakeholders. If public and private stakeholders join hands, there is every reason to believe that industry ships will sail through this global crisis with flags flying high.

(By Pankaj Pal, President – Business Development & Strategy, AIPL)

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