Is the Real Estate sector in India tested positive with COVID-19?

The Real Estate sector is one of the most globally recognized sectors. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. It was expected back then that the market size of the Real Estate sector By 2040, will grow to Rs 65,000 crore (US$ 9.30 billion) from Rs 12,000 crore (US$ 1.72 billion) in 2019. Real estate sector in India is expected to reach a market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017 and contribute 13 per cent of the country’s GDP by 2025. Retail, Hospitality and Commercial Real Estate are also growing significantly, providing the much-needed infrastructure for India's growing needs. Indian Real Estate market has been increased by 19.5 per cent CAGR from 2017 to 2028.

Covid-19 Impact:

It is difficult to think of a business that has not been impacted by the Covid-19 pandemic. However, for the Indian Real Estate sector, the impact of the crisis can be a double malediction. The sector, especially the residential segment has already been struggling with the project delays due to various reasons faced by the Promoters, regulatory changes such as Real Estate (Regulation and Development) Act, 2016 (RERA) the impact of GST. Because of all these, the sale was not up to the mark.

The sector, according to reviewers and Promoters will face these three following hardships due to Covid-19:

1. Labour and raw materials shortage.
2. Liquidity in the present market.
3. Lesser demand by the consumer.

1. Labour and raw material shortage: The key ponderable for a large employee-based sector like Real Estate is how their balance sheet will reflect when their contract workers who have migrated back to their hometowns in the absence of work. The human resource is largely still at the construction sites. Although, some big players in the market have successfully retained their labours by giving them daily wages and providing them with the other facilities when there is no work but that will still impact them. At present, international trade restrictions have been imposed by the Union of India and therefore the supply of essential raw materials to the Real Estate sector has been stopped. Furthermore, China which has been the epicentre of the Covid-19 pandemic, happens to be the biggest supplier of raw materials such as steel to the Indian Real Estate industry. Therefore, the present crisis could lead to a shortage of supplies and a subsequent price escalation.

2. Liquidity in the present market: The liquidity crisis has been a concern for over a year or two after the demonetization with the disruption caused by Prime Minister Modi’s cash ban and with that, non-banking lenders staying away. To bail out the stressed project, in November last year, the central government announced a Rs 25,000-crore fund to help complete over 1,500 stalled housing projects, including even those that have been declared NPAs (non-performing assets) or admitted for insolvency proceedings. The Maharashtra Real Estate Regulatory Authority (Maha RERA), has decided to extend the validity period for registration of real estate projects, whose date of completion or for that matter extended completion date gets over on or after March 15, for a period of three months. The RBI has announced a series of steps including cutting down the reserve repo rate to 3.75 per cent from 4 per cent earlier. It also decided to infuse Rs 50,000 crore in NBFCs to improve liquidity. This decision of revising the reserve repo rate would ensure cash flow and liquidity in the market. 

3. Demand by the consumers: With uncertainty looming over jobs, layoffs, salary cuts and future cash flows, purchasing a new flat would be the last thing on the buyer’s mind these days. There are misgivings about the impact on demand for commercial space, with the work-from-home alternative getting tried and tested during the lockdown and it is proven to be successful too. In the present scenario, there's uncertainty and people have deferred their plans to invest in Real Estate.

Conclusion and personal views:

World Health Organization (WHO) has declared COVID-19 as a pandemic on 11th March, 2020 and after that Union of India declared a complete lockdown from 25th March, 2020. Since then not a single brick has been positioned on the construction site. The report states that the Real Estate Sector has hit an all-time low level in March 2020 (quarter-end). So yes, the Real Estate sector in India tested positive with COVID-19. But there are few measures or guidelines which can be considered to revive the sector:

Measures that should be taken by the State and Union Government:

• Need to incentivise migrant workers to return to work as soon as possible after lockdown is lifted.
• Consider waiver of stamp duty and registration charges to encourage demand.
• Reduction of GST.
• Review ready reckoner rates.
• Allow a staggered or deferred pay-out for land and related charges like Transferable Development Rights (TDR), Municipal taxes, project registration charges in RERA, etc. as no one will be able to pay at once.

For Reserve Bank of India:

• Enable effective transmission of monetary policy to pass on rate cut benefits to borrowers.
• Direct banks to shed risk aversion and lend to the Real Estate sector.
• Need to directly purchase corporate bonds and commercial papers to maintain liquidity in the system.
• Consider one-time restructuring for the Real Estate sector.
• Enter into renegotiations with borrowers before they invoke the force majeure clause.
• Shift Non-performing asset (NPA) recognition cycle to 180 days from 90 days for a period of 3-6 months.

For Developers:

• Offload inventory at lower prices to ensure liquidity in their hand.
• Leverage long term relationships with lenders to guide them through crisis times.
• Use moratorium only after assessing the long-term strategy and capability.
• Focus on completion of existing projects, rather than pushing new launches.
• Enhance the equity cushion at whatever price as it will help the company in the long term.
• Enter into partnerships with large corporate through joint venture and development manager model.
• Raise standard on corporate governance and transparency which will bring credibility that will ultimately boost sales.

In his video conference with chief ministers on April 11th 2020, Prime Minister Narendra Modi made a pitch for ‘Jaan Bhi, Jahaan Bhi’. The reason for the shift from the earlier statement of ‘Jaan Hai Toh Jahaan Hai’ is a clear recognition of the reality that economic disquietude cannot be ignored indefinitely.  Real Estate is a driver of the Indian economy. It is supporting 260 allied industries. The steps need to be taken not only to revive the Real Estate sector but also to have the concrete mixer rolling again at the construction site.