Impact of Corona Virus on Indian real estate
The pandemic has left global economy rattling leaving businesses cumulating with losses making revival a lost cause. The lockdown initiated as an effort to flat the curve of COVID-19 has left everyone caged in their homes resulting in unemployment. The largest employment generator sector in India, the real estate sector, has hit a brick wall. Many Indian real estate companies anticipated 2020 as a year of revival with the hope that the buyers may return for housing & commercial properties with the government offering incentives & RBI lowering interest rates. Also, the recent issues observed in the financial market had been foreseen as a sign for the investors to invest in real estate as the safest investment option with property prices dipping significantly. The health emergency has forced companies globally to keep their office running by asking employees to work from home. The experiment has put up a big question on the relevance of working spaces in the post coronavirus world.
The lockdown initiated in India from March 25, 2020, by the Indian government till May 30, 2020, to contain the coronavirus has adversely affected the economy of India which is already slow downed by 11 years. Though India is in its fourth stage of coronavirus pandemic, there is still a drastic rise to the number of cases being reported especially with all the NRIs returning from the infected countries back to India. As of May 25, 2020, two months after the lockdown was initiated, the number of cases is 138917 and is increasing.
Many research agencies have predicted a major halt in the growth of the real estate industry in India. Economic Times of India has reported that there will be 25-35% of reduction in housing sales & use of office spaces to decline by 13-30% as a result of the negative impact of the coronavirus.
Some of the industry experts like Dhruv Agarwala, Group CEO, Housing.com, Makaan.com, and PropTiger.com have said, “While the Chinese economy has been reeling under the impact of the Coronavirus contagion since December 2019, the situation started to get worrisome in India only in March 2020. Following the spike in a number of infections, the government first announced a 21-lockdown on March 24, and then extended it till May 30, keeping in mind the severity of the situation. The lockdown, which has virtually brought to a standstill most economic activity in the country, has hurt all sectors, including real estate. The adverse impact of the Coronavirus is visible on housing sales in the last quarter of the last fiscal because March is usually one of the biggest months for sales,” .
While Knight Frank India CMD Shishir Baijal said in a statement, “The historic rise in the office transactions is a significant growth indicator for the office market as it represents the continued commitment of domestic and global corporations in the country’s growth potential despite the ongoing economic slowdown,”.
As a reality check, for now, we need to expect the global calamity would severely impact the real estate industry in India as the government gets busy coming up with plans to save businesses & the country’s economy from sinking deeper into losses while keeping in mind the fear of rupee declining in value compared to US Dollar.
However, every day makes a great difference in the current situation and it is very difficult to fully predict what would happen next. The best we can expect is to be prepared to face at least a short term shocks in the real estate industry.
COVID-19 Impact on the Indian housing market.
The Coronavirus pandemic has made the recovery of the real estate industry difficult even though many expected the opposite due to revisions made in many government policies related to housing loan interest etc. seemed to make a promising hike on the demand of real estate investments. It is predicted that the real estate prices would take even some more time to come down than expected. According to Niranjan Hiranandani, national president, NAREDCO “Salvaging Indian realty, the second-largest employment generator is critical, not only from the GDP growth perspective but also for employment generation, since the sector has a multiplier effect on 250-plus allied industries.”
The central government of India had announced higher tax breaks and even decreased the housing loan interest rates to ensure the purchases more smooth. They have also set up a stress fund Rs 25,000-crore for stuck projects.
The changes made in the Real Estate Regulatory Authority (RERA), the goods and services tax (GST), Benami property law & demonetization had significantly slowed down the demand in the residential segment. This has cut down the housing sales, project launches, and price growth in India’s residential realty sector.
In a statement released by the ICRA, if the pandemic continues for a longer duration, the real estate developers will suffer from a delay in cash flow and delay in project deliveries. Also, the 3-month moratorium announced by the RBI on all types of loans extended till August 31, 2020, may offer a source of comfort for the builders & home loan availed for some time.
The RBI has released a statement stating that they would inject liquidity of Rs 3.74 lakh crore along with a 3-month moratorium which would elevate the worries and help real estate developers & buyers to face the economic challenges. As there will be a delay in project deliveries, the government has asked the project deadlines to be extended by 6 months through the RERA citing the force majeure clause.
“Due to the lockdown announced on account of the COVID-19 outbreak, both, construction and sales activity, have come to a complete halt across the entire real estate sector. On several sites, construction workers, too, have gone back to their hometowns. Even after the lockdown, the activity will only recommence gradually, which will cause project delays of anywhere between 4 to 6 months at the least,” said Sharad Mittal, CEO, and head, Motilal Oswal Real Estate Funds.
COVID-19 Impact on home buyers in India
The pandemic has caused many people to lose their jobs, decrease in payrolls, and face the worst economic crisis they have faced in a lifetime. The people who have taken home loans have faced the major impact as they depend on their monthly salary to pay off their debt. Though the RBI has issued a 3-month moratorium, a decrease in housing loan interest which is at 8%, high tax exemption, etc., consumer behaviour is not likely to change in the real estate industry. The home buyers may delay of investments for a short time due to the coronavirus.
Due to the intense lockdown situation, the site-visits by the property buyers are out of the question which will have an adverse impact on purchase decisions. No one would stick to the online shopping of properties. With no assurance of job security, the idea of making a big real estate investment is out of the question. The industry expert Mr Hiranandani states, “With the Coronavirus pandemic impacting all sectors of the economy, troubles have compounded for India’s realty sector which has been dealing with a ‘challenging scenario’ since the economic and policy reforms were introduced. The slowdown since February-end is apparent; and while site visits are almost non-existent, the decision-making process is hugely delayed,”
The RBI announced several rate cuts, bringing the repo rate down to 4%, which is expected to have only a medium positive impact on buyer sentiments for the long-term. The measures announced by the RBI are likely to be a great relief for existing buyers who might suffer struggles in paying the EMIs due to job loss.
COVID-19 Impact on builders in India
The real estate builders & developers have been facing big slump-hit due to the coronavirus. The builders highly depend on migrant labourers to finish off construction works who have induced big immigration back to home towns due to lack of job & wages. The pandemic has impacted the non-banking finance sector adversely resulting in delays in projects as the property builders depend on these sectors for financial funding. The builders in India are expecting the Indian government to pull them out of this dangerous pit of unsold stock. According to PropTiger.com, the developers have unsold stock worth Rs 6 lakh crore as of March 2020. The lockdown has caused a delay in the projects due to a lack of manufacturing material & equipment from other countries. The delay in the delivery of projects may cause a major increase in construction budgets causes heavy losses.
The government has come up with major Coronavirus-specific stimulus package and the EMI holiday for developers during these unfortunate times which may act as a major relief for the developers and builders. According to Mr Hiranandani, the developers and builders are facing difficult times during the otherwise profitable time of the year as this is the time where statutory payouts and streamlining of balance sheets happen in the realty industry.
COVID-19 Impact on office space in India
The pandemic has forced big & small companies all around the world to accommodate the work from home policy for their employees keeping in mind the need to flat the curve of coronavirus infection & also to keep their companies running. The work from home policy is expected to extend for a longer period as the cases are still increasing with many NRIs returning home. We are looking at a future where work from home could replace office spaces.
Will this policy affect the level of success achieved by the business is arguable, the remote working may cause a major issue in the commercial real estate industry in India. Technology like group video calling, zoom calling may replace the need to work under a roof as a team, the question is, “How much impact the technology-driven teams work has on the overall productivity of the company?”
As the requirement for office spaces decreases with the remote working policy comes into the scenario, the office utilization rates will fall effecting the landlords who lease their buildings for short terms. This will impact investments made into the commercial real estate industry. There will be a softer growth in the commercial space rents. Though the demand for remote working & investment in collaboration technologies like Zoom would grow, in the long run, this trend may not become a major threat to future demand for office spaces. The need for higher utilization & the growing demand for employment will outweigh the current trend and push the demands of office spaces.
COVID-19 Impact on mall developers in India
When coronavirus hit India, the malls, cinema halls & gyms were the spaces to first face the brunt of government decision to close down spaces where people gather and likely to spread the virus. With the existing threat of the virus, the opening of malls where larger crowds are expected can be delayed for the long term which in return will adversely impact developers’ debt servicing against the project.
Mr Riyaaz Amlani, managing director of Impresario Entertainment and Hospitality, expects 30-40% occupancy of malls & entertainment spaces with higher operation costs & lower revenue as contactless dinning may be implemented for a few more months. He expects retailers & malls need to work as partners during this critical situation
After the government withdraws the ban on malls and can be opened to the public, the businesses in the malls are expected to slowly regain the normalcy back as people may utilize the confidence they get from gathering in public like old times. The major player that would make malls more attractive would be air quality, highly improved hygiene standards sanitization and awareness, etc. The shutdown of malls, gyms, entertainment spaces, etc. have put the commercial real estate sector on a major halt.
Mall and retail owners expect the wallets to focus on them once the advisory is lifted as the travel industry around the world will continue to be closed to contain the pandemic for longer durations. They expect travel will not be a priority and people may invest more in entertainment & leisure in the home cities.
Real estate sentiments hit the lowest level
he real estate sentiments hit the lowest level in the March quarter due to the global pandemic. According to a real estate sentiment Index Q1 2020 Survey, the revival signs shown by the end of 2019 in the real estate industry have suffered a major setback due to the coronavirus. More than 60 per cent of stakeholders expect the current lockdown situation will affect residential project launches, prices, and sales at least for the next 6 months. The construction industry may find it hard to launch new projects due to a halt in construction and labour shortage. The leasing activities of the office spaces & commercial spaces may be impacted severely due to the uncertain economy and major dip in rental appreciation.
Many real estate portals believe the pandemic may bring a short term impact in the real estate industry, but with revised property loan guidelines, they expect many buyers to take advantage of the lowered interest rates and may transition from living in rented properties to buying their residential properties. Chances are that the real estate companies may offer the best deals for the buyer’s Real estate investments are expected to remain stable in 2020 as PE funds, foreign developers, sovereign funds, etc. are taking an active interest in these assets. The only catch is the lack of built-up and leased office, retail/logistics assets, which is expected to push buyers towards alternate segments/greenfield options.
The pandemic may seem to consume our lives at first glance. However, the whole lockup situation gives everyone an insight into alternative options for workspaces, residential and commercial spaces. The path to greater profits may seem clouded, with proper study & analysis with an optimistic outlook we can overcome the worst. This too shall pass.