With Covid-19 disrupting economic activity across the globe, the question floating in everyone’s mind is : “How bad would the situation get?” The extended lockdown that was imposed to curb the spread of the virus has left most industries in a lurch, including the realty sector.
While the sector has been ailing even in the pre-Covid era, the pandemic has brought even more gloom. The last few months saw project sites being shut, no site visits, and hardly any construction activity. The situation has further worsened, making it the ‘Third Black Swan’ for the realty sector, next only to demonetisation and the introduction of the Real Estate Regulation and Development Act (RERA), 2016.
And that’s not all – the sector now faces other risks, including reduced discretionary spending and delayed CAPEX cycle.
Cash-Strapped Construction Sector
Global ratings agency, CRISIL estimates a 12-16% fall in construction investments this fiscal. Furthermore, the COVID-19 pandemic and subsequent lockdown are also likely to lead to a drop in infrastructure spending, as resources are increasingly being diverted towards meeting healthcare and social needs.
The dependency on public funds is another critical factor after public-private partnership has failed to offer encouraging results. The share of private spending fell from 26% in 2010 to 17% in 2020, according to a CRISIL research, and that doesn’t spell good news.
The funds assigned to the sector also do not instil investor confidence. The budgetary allocation for fiscal 2020 for the infrastructure sector declined 7% over the revised estimate for the same fiscal year. In fact, predictions suggest that the pandemic and the subsequent lockdown is also likely to impact the government revenue, as both direct and indirect tax collections are expected to fall.
The allocation for states for the sector have also witnessed a decline. Funds to large Indian states like Uttar Pradesh, Maharashtra, and Gujarat that constitutes 26% of the states’ infra allocations have witnessed a contraction, as compared to the previous fiscal.
States have always contributed the bulk of their investments towards urban developments. In these top-spending states, expenditure priorities have shifted to healthcare – a state subject. Moreover, the state excise duty collections are likely to sink after alcohol sale was banned for a month, and fuel consumption crashed.
The turmoil in the global economy is likely to impact the external borrowing capacity of the government. With construction activities deferred, the revenue in the construction sector is expected to plunge by 13-17%.
Housing Struggles to Open Doors
The adverse impact of Coronavirus on housing sales has been visible from March, as the month usually witnesses high sales. Low-interest rates, which stand around 8% and high tax exemption against home loan interest payment, as high as Rs 3.50 lakh per annum, have failed to move the market.
Pay cuts, job losses, and general anxiety about how the future will pan out has cast a shadow on property purchases – at least in the near to medium term. However, home loan interest rates will be revised downwards after State Bank of India (SBI) lowered the Marginal Cost of Fund Based Lending Rate(MCLR), the minimum lending rate below which a bank is not permitted to lend, by 25 basis points (100 basis points= 1%) from June 10.
Property prices might fall by 10-20 %, while the land prices could reduce by 30%, according to real estate consultancy firm Liases Foras. Inventory of 6.24 lakh units, worth Rs 3,70,000 crore, lying unsold in the top eight metro cities of India, with no hope of clearing in the near to mid-term, has plunged real estate sentiments.
Dark Cloud Looms Over Commercial Estate
As health and hygiene have become critical in the last few months, firms have moved entire offices to homes. A survey by Knight Frank India suggests that over 70% of companies could extend the work from home policy for another six months.
A report by Colliers supported the trend, stating that the demand for office space will plummet in the first half of 2020. Whether this would replace office spaces permanently is a debate for later, but one thing is certain – this will be a severe blow to commercial real estate.
The shutdown of retail outlets, malls, and entertainment and fitness centers have put commercial real estate deals in this segment on a wait-and-watch mode. The cash flow situation of mall developers has been impacted and could get worse, if the pandemic is not contained soon, according to rating agency ICRA.
Obstruction in Construction
Supply chain disruptions have further impacted an already beleaguered real estate. India is a big importer of raw materials like iron and steel products, technical construction equipment, electronic equipment, and solar panels from China. As production shut in China due to Covid lockdown, supply chains suffered and costs increased leading to lower margins for real estate developers.
Construction companies faced challenges in arranging transportation and accommodation for labour, maintaining social distance at work sites, obtaining clearances from the district officials, and availability of raw materials. The sector is likely to take some time to return to normal. The bulk of construction activity is likely to resume in the third quarter.
The Indian economy was prepared to slow down to a record 11-year-low, but a prolonged lockdown will worsen the situation further for Asia’s third-largest economy. As the spread of infection increases, the real estate industry needs to prepare itself for an even worse impact than previously thought.
All is not Lost
There are some silver linings too. While the world battles a global recession with the U.S. and Europe as epicentres, it could be an opportunity for India to attract investments. The falling value of rupee will be another incentive for investors to put their money in the country. Additionally, a fall in repo rate would translate into cheaper credit for loan seekers and help NRIs get loans at lower rates.
The three-month moratorium provided by the Reserve Bank of India should also aid developers. The central bank on May 22 extended the moratorium till August 31, 2020. To help the builders with deteriorating liquidity situations, the government has allowed developers to extend their project completion deadline by 6 months under RERA, citing the Force majeure clause.
The world has faced similar outbreaks such as SARS virus, bird flu and other global health hazards in the past too, and has successfully recovered.
Indian real estate and allied manufacturing industries must look for “opportunity in crisis” and benefit by increasing production and indigenous innovation. Hopefully, the government will be able to flatten the infection curve soon and in the meantime handhold the industry in this time of crisis.
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