Covid-19 Impact on Real Estate: How residential realty will get impacted by reverse migration of workers

May 6, 2020 5:52 PM

Lack of work due to COVID-19 has led to a reverse exodus of labourers. For an already-stressed realty sector, multiple measures are needed to turn the tide and restore normalcy.

real estate, residential real estate, reverse migration of workers, COVID-19, covid-19 impact on real estate, lockdownShort-term disruptions due to COVID-19 could be managed. Yet, what happens if delays extend beyond one year due to the current market conditions?

In the best of times, hiring labour for the realty and construction industries is challenging. Now, the nationwide lockdown due to the COVID-19 pandemic has created an unprecedented predicament. Since millions of workers have migrated to their hometowns due to lack of work, employers are dreading a nightmare scenario. Even when the lockdown is lifted, kick-starting operations will be extremely difficult for almost all sectors.

For a labour-intensive industry such as real estate, the reverse migration is tantamount to the last straw on the camel’s back. What may make matters worse, paradoxically, are the steps taken by the Centre and States to ensure workers have adequate rations and sustenance wages. Developers are now wondering – why will workers return to cities if they are receiving sustenance at home?

Catch-22 Scenario

This parallels the time when the introduction of minimum assured wages via MNREGA made many village labourers unwilling to travel far from their homes. Accordingly, even if restrictions are lifted, workers may not return soon to their employers. For developers, this could cause delays stretching a few months or more. If these are prolonged, realty will be hard hit. Prices will then stay depressed until normalcy returns. Presently, homebuyers are reluctant to book in under-development projects, preferring ready-to-move-in flats since it greatly minimises risks.

Under the circumstances, shortage of construction workers is bad news for homebuyers awaiting flats, even if the projects are almost nearing completion. Labour shortage apart, near-total restrictions on logistics and transport have disrupted supply chains, creating a scarcity of raw materials. Therefore, developers could confront a catch-22 situation – even if they persuade workers to return, there won’t be work in the absence of construction materials such as cement, steel and allied items.

While delayed projects in the pre-RERA era did not affect developers so adversely, this is no longer true. Developers can now be penalised and even put behind bars for inordinate delays. Of course, RERA does provide promoters with a one-year extension in completing projects if the delay is because of events beyond their control. In other words, short-term disruptions due to COVID-19 could be managed. Yet, what happens if delays extend beyond one year due to the current market conditions?

No easy answers exist as COVID-19 is a constantly-evolving crisis. Even if the lockdown is removed, migrant workers could remain reluctant to return because of the uncertainties involved, especially if the coronavirus threat still looms large over the country.

In some instances, migrant workers may still be stuck in cities if they were unable to manage transport back home or were not allowed to move out of their current workplaces. Again, developers may not be able to capitalise on the presence of such ‘captive’ workers. The moment restrictions are removed and interstate transport allowed, workers will be eager to rush home to their wives, children and aged parents – who would be equally anxious to have them back home.

In such uncertain conditions, the only way developers and contractors could recruit workers is by offering extra wages or incentives, including safe working conditions. Again, this is easier said than done because with work suspended, inventories are rising even as profitability drops every month. As work is further delayed, buyers will be all the more reluctant to book under-construction flats, instead opting for ready units. In turn, this will set off a vicious cycle of no work, no labour; no liquidity, no project completion; no completion, no bookings. The impact this will exert on builders’ bottom lines can well be imagined.

Lives versus Livelihood

Though there is no doubt that the lives of people are important against the unparalleled threat posed by COVID-19, the authorities, including the WHO, are realising that livelihoods are equally critical. Already, heart-wrenching reports of starvation deaths, suicides and hunger-induced homicides have been coming to light periodically. Whereas there are no simple solutions in such situations, a delicate balancing act is required whereby essential services and large-scale employment generating sectors such as agriculture and construction are authorised to resume operations. It is no solace to the poor that they are saved from COVID-19 but fall victim to starvation.

Nonetheless, if essential services and select sectors are permitted to restart work, even gradually, the realty sector can bounce back strongly. This will be contingent, however, on supportive steps from the authorities. One of the first measures needed is ensuring adequate liquidity in the market.

Earlier, developers availed of FDI and PE funds to meet liquidity requirements. Unfortunately, due to volatility in the global economy, foreign investors have exited the Indian markets in recent months. As a result, property prices continue being depressed. Despite the dark clouds, developers were eagerly awaiting the launch of REITs (Real Estate Investment Trusts), slated for listing sometime this year. Under the current conditions, though, the listing is likely to be postponed yet again, exacerbating developers’ liquidity woes.

To boost liquidity, the RBI needs to lower the repo rate further and mandate banks to pass on these benefits to consumers quickly. Unless buyers’ sentiment improves, inventory levels will remain high. The importance of institutional support for realty cannot be overemphasised. Besides being one of the nation’s largest employment generators – providing opportunities to both skilled and unskilled labour – realty has multiple upstream and downstream linkages with 250 allied verticals. Thanks to this, a real estate revival can spur nationwide growth.

Regrettably, some reports indicate that 300,000 workers have already been laid off by developers across India due to the ongoing slowdown. Moreover, as per an April 2020 KPMG report – Potential impact of COVID-19 on the Indian economy – the real estate industry will witness an estimated job loss of around 30%. Undoubtedly, the economy cannot afford additional job losses of this magnitude.

Consequently, ameliorative measures are needed on a war-footing. These could include relaxation in RERA compliance norms for residential projects and waiving repayments (including the interest component) for developers up to three months and, thereafter, increasing this period as per ground realities. A lower lending rate should also be offered for real estate development and the NPA classification for stressed projects extended beyond the current 90 days.

Given the country’s dire employment and economic landscape, a revival in the real estate sector can help usher in a pan-India upsurge across varied verticals. The workers who have migrated will then need no further incentive in getting back to work at the earliest.

(By Avneesh Sood, Director, Eros Group)

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