The current pandemic has changed the way real estate is both sold and consumed. Consumers have also changed the way they view real estate – with home ownership now becoming a top-of-mind consideration for young people. A home, in fact, now is no longer a place to spend merely evenings and weekends – it has to be able to double up as an office, or a movie theatre, or a gym, or a restaurant. The utility the space offers the consumer is now more important than ever and buyers are willing to spend more than they previously did on a home, says Jay Goenka, Director, Dynamix Group.
In an exclusive interview with Sanjeev Sinha, he shares this views on how COVID-19 has shaped the real estate sector and what will bring the sector back on its track. Excerpts:
How has this pandemic shaped the Indian real estate sector?
The COVID-19-induced pandemic has changed the way real estate is both sold and consumed. Traditional sales strategies which relied on heavy marketing across print and outdoor media coupled with strong in-person distribution have been relegated to the annals of the ‘pre-COVID’ epoch. Developers now rely on extensive digital marketing tools and use these platforms (Facebook, Google, Zoom, etc) to not only market, but also sell their wares.
Consumers have also changed the way they view real estate – with home ownership now becoming a top-of-mind consideration for young people once again. The push towards financial asset ownership crowded-out home ownership from the minds and pockets of young people. This coupled with traditionally low rentals across major markets saw a push towards renting. However, with the onset of the pandemic, people have seen the value of their financial assets drop precipitously, almost overnight. They faced salary cuts, uncertainty at work and potentially lay-offs. Making the monthly rent payment became a challenge and the risk of eviction loomed large for some.
By contrast, the homeowner saw the interest on her home loan fall during the same period, thanks to the RBI’s reducing of benchmark rates. For those who couldn’t make EMI payments, moratoriums were offered. And house-prices barely moved. The result was that parents and grandparents could legitimately say ‘we told you so’ and push their kids towards re-considering buying the roof over their heads. Buyers are therefore now a lot more serious when they make an inquiry to purchase a home. And these inquiries culminate in a decision within a much shorter period than they did previously.
Customers have also changed the way they look at space itself. A home is now no longer a place to spend merely evenings and weekends – it has to be able to double up as an office, or a movie theatre, or a gym, or a restaurant. The utility the space offers the consumer is now more important than ever and buyers are willing to spend more than they previously did on a home, provided it allows for minimised disruptions to their lives.
How has the pandemic affected your company operations?
The initial few months of the lockdown disrupted the operations of companies across India. Real estate companies like ours were no exception to this. Our construction sites were forced to close – almost overnight. The migrant workers who worked on these sites, after having spent months away from their families during these troubled times, seized the opportunity to emigrate back to their hometowns and villages as soon as transport networks reopened. Along with this was the mandate to adapt to working from home – a challenge for those who have spent their entire career working out of a corporate office and ecosystem. Sound communication and IT infrastructure was of paramount importance to ensure productivity during the months of lockdown.
Thankfully, we were able to adapt to these new demands very swiftly, with new technology and modes of communication being embraced by company insiders as well as external stakeholders, contractors and consultants. Working from home quickly became as productive as being present in the office, with the result that we still work with over 70% of our staff at home, with pre-pandemic levels of efficiency. And as the country started ‘unlocking’ we have seen the return of a lot of labour to the construction site and work continuing on at a pace comparable to the pre-pandemic levels.
What will bring the real estate sector back on its track, according to you?
Real estate as a sector has been subject to serious extraneous shocks over the past 4 years. The Real Estate (Regulation and Development) Act was succeeded by demonetisation in 2016. This was followed by the introduction of the Goods and Services Tax regime (and its subsequent changes with respect to real estate). In the two years leading up to November 2018, the Development Control Regulations of Greater Mumbai were undergoing substantial changes, as the Sanctioned Revised Development Plan of 2034 was coming into effect. This led to a situation where developers were planning buildings which fit two bodies of regulation – the existing ones and the proposed draft regulations, with little certainty as to what colour the new rules would ultimately take. As the dust settled on GST and the final Development Control and Promotion Regulations, 2034 were notified, the ‘NBFC Crisis’ induced by the happenings at IL&FS choked vital credit flow to the sector. The sector remains starved of credit even today. And all this was underpinned by the broad economic slow-down which the country faced. The pandemic induced by COVID-19 is the latest shock which the sector (and indeed the world) is dealing with.
Structurally, certain micro-markets seem to be well on the road to recovery. The Mumbai Metropolitan Region (MMR), for instance, was a market heavily supplied with luxury residential projects. Over the past few years, developers have shifted their focus away from this segment and towards faster-moving, more affordable developments. Furthermore, thanks to the shocks I enumerated above, the number of active developers has hugely fallen – only serious players remain. As a result, project launches have reduced. The period of the pandemic notwithstanding, the MMR continued to steadily consume around 20,000 – 25,000 apartments per quarter. Coupled with lower launches, this has caused the stock of unsold apartments to fall. The net result is an inventory overhang (measured as the number of months required to sell the outstanding unsold stock at the current monthly sales velocity) which has reduced from 40 months (Q2 2017) to a much more sustainable 25 months today. There is some way to go still, but these trends are encouraging at a structural level.
In addition to the structural rebalancing which the sector is going through, real estate can be given a fillip through a few important and concerted policy moves. Ready Reckoner rates today are higher than transaction prices in a lot of localities. These rates determine (amongst other costs) the property tax a homeowner pays, the stamp duty on the purchase price of a flat, and the premiums that developers pay. Recurring annual payments (such as property tax) and transaction costs (such as stamp duty) stretch consumer budgets. This makes apartments unaffordable for many. Rationalising and reducing ready reckoner rates ought to therefore be seriously considered by the authorities.
In Mumbai, depending on their location and type of project, developers end up paying between 2 and 4 times the value of their land in the form of development charges and premiums to the government or local municipality. These costs form the lion’s share of a project’s development cost, informing the minimum price a developer can sell flats at. Policy makers can consider reducing premiums as a route to stimulate the sector. Finally, the providers of credit must pass on the benefits of reduced interest rates and easier liquidity as a result of the RBI’s recent announcements, to their borrowers in the form of lower EMIs and interest costs. This, along with enhanced credit availability to viable projects will be a boon to the sector and the homebuyer.
Action is already been taken to stimulate the real estate sector, which is the second largest employer in the country. For instance, the Government of Maharashtra has recently taken a decision to reduce stamp duty on immovable property transactions by 3% until 31st December 2020 and 2% from then till 31st March 2021. This has provided a massive impetus to the sector, with customers choosing to make and register their purchases during this window. Further action along similar lines will serve to bring the sector back on track swiftly.
What about new launches?
Launches across the country have been trending downwards since their peak in 2011-12. The country now sees quarterly launches of between ~75,000 and ~120,000 units (depending on the quarter, with the festive seasons bringing relatively more launches). This is down from the peak of ~180,000 units launched in Q1 of 2011. The pandemic months have seen launches which are no more than ~18% of the previous quarters accelerating the existing downward trending project launch trajectory. Furthermore, the mode of launching projects has now changed, with developers relying on digital assets and tools, rather than newspaper advertising, hoardings, in-person channel-partner meets and site visits – a change which will take some time to set in fully. Finally, developers have been focussed on consolidating their holdings and selling their existing unsold inventory, rather than launching new projects.
Any recent trend or development in the real estate segment?
The move back towards homeownership, which I explained previously, is an important trend which is currently playing out in the sector.