The recovery of the sector post the COVID -19 crisis will be slow and hard. In order to facilitate its revival, the focus will have to be on the resurrection of demand.
Very well-identified and clear social and economic factors have been responsible for the residential real estate market primarily, not faring very well in recent years. The overall sector, with the exception of commercial property, has been reeling under the pressure of economic slowdown, liquidity crisis and changing consumer preferences, resulting in low demand.
The challenges posed by the policy, regulatory and procedural changes implemented in 2016 in the form of Demonetization, GST, and RERA, have only been compounded by the NBFC crisis. With hardly any liquidity in the market, investors lost confidence, despite the presence of viable projects.
To combat some of the challenges especially on the liquidity front, the government launched the Alternative Investment Funds (AIF) and various other measures in tandem, in order to support the sector. However, these measures have fallen short of retrieving the sector from the depths of an abyss. The stockpile of unsold inventory is witness to consumer confidence having hit rock-bottom, along with there being a dearth of low-cost capital available. Paradoxically, all this was already in existence much before the arrival of the dreaded COVID pandemic in India. The Coronavirus outbreak further aggravated the conditions, by diminishing the likelihood of value appreciation in the property market.
According to market reports, in the first quarter of 2020 ~78,000 ready-to-move-in units, valued at Rs 65,950 crore, accounting for around 12 per cent of the 6.44 lakh units in cities, are lying unsold. While the COVID–19 pandemic has inarguably hurt market sentiment, it is likely that the market won’t see too much change in inventory levels, at least in the immediate future. The true picture will emerge only once we understand the extent of the crisis. Till such time, developers themselves will postpone new launches or carry out only limited launches.
Although it is proposed that developers slash prices to clear unsold inventory (which is yet to be finished), it might not be a viable solution as per market dynamics. Considering developers are short of cash and overwhelmed by the liquidity crunch, reducing prices will only add to their woes and impact business continuity. Lowering prices may affect housing stock being sold in the short-term, but it will only prove to be damaging to the development of businesses and prospects of the sector in the longer term. Furthermore, the clauses in the Income Tax Act currently restrict pricing beneath the circle rates and can lead to penalties being levied on developers. On the contrary, given that people have faced many challenges during lockdown and a majority of them continue to work from home, it is only expected that the ready inventory will be in huge demand. The developers may not pass on any reduction in prices on those, but may charge a slight premium instead on ready properties.
From a buyer’s viewpoint, there are problems and challenges galore prevailing in the sector. As stated before, consumer confidence was already sinking when the virus came and took a further beating. The present conditions have left a large majority of people working across sectors and salary brackets, either anxious about their job security or anticipating salary cuts. This ambiguity has led them to ‘put-off’ discretionary spends even on necessities like housing. On the flip side, this has generated a bigger potential for ‘rental housing’, as an alternative.
This segment has potential and can foresee further growth post COVID-19, as well. Given the all- pervasive uncertainty and instability, there are chances that more people will choose renting houses, over purchasing property. Even the lower strata of the workforce will see some reprieve as the government’s is putting in place incentives to organise affordable rental accommodation for migrant workers, where a large demand exists. So one safely states that there is hope for the sector, despite the challenges – where the existing stock in the market can cater to different consumer needs.
Additionally, the government and statutory bodies have supported the sector through various initiatives and stimulus packages, the RBI too has intervened, from time to time to boost liquidity. One of the major moves has been the reduction in repo rates by 40 basis points to 4%, along with the lowering of reverse repo rates to 3.35%. This highest ever cut in interest rates will aide in alleviating the on-going liquidity challenge of developers.
Additionally, the further extension of loan moratoriums by 3 months up to August 31, 2020 will help take the load off them. Besides the suspension of interest on working capital loans to be repaid by March 2020 resulting in relief for the developer, fostering investment and bolstering demand in the sector, the buyer will also benefit from cheaper home loan EMIs. The insertion of ‘force majeure’ clauses in contracts, extending construction periods by 6 months, will also mitigate the risk factor for developers and contractors.
However, it will take time for these measures to take-off, and this could mean a further delay for housing projects. The recovery of the sector post the COVID -19 crisis will be slow and hard. In order to facilitate its revival, the focus will have to be on the resurrection of demand. Till the time this happens, there are a few things that can offer immediate relief to developers. The benefit of repo rate should be passed on to the buyers directly from the banks. They should look at alternative real estate asset modelling, from capital sale purchase to rental housing models. They should give the benefit of increased tax incentive through improved tax structures to the buyer and target Tier 2 & Tier 3 cities for growth.
(By Nimish Gupta, MD, RICS South Asia)