With the economy slowly opening up after the coronavirus-triggered lockdown, a new question about the future of the economy appears on the horizon. Well, there is hardly any sector that has not been impacted by COVID-19 (coronavirus). Same goes for the real estate sector in India. We discuss the prospects of the real estate sector -COVID in this article.
This article covers:
Overview of the real estate sector in India before COVID
The real estate sector in India had been reeling even before the advent of COVID-19 due to compliance, demand, financing, and labour shortage. To escalate the issues, activities in the real estate sector came to a complete halt during the lockdown. Now, with the economy slowly opening up after the coronavirus-triggered lockdown, you would be interested in knowing what the post-COVID era looks like for the Indian real estate.
While the answer to this question is not black or white, here are some opportunities and threats to the real estate sector in India. These pointers will help you understand how the real estate sector may fare after COVID-19.
Overall, experts, developers, and investors in the domain have mixed opinions about the prospects of the real estate sector in India after COVID-19. Whereas in the pre-COVID era, the realty sector was hit by policy changes, low sales, GST implementation, and other factors, during the lockdown, the entire sector came to a standstill, meaning zero operations.
Naredco has, in one of its reports, forecasted that the real estate in India is expected to incur a loss of Rs 1 lakh crore because of COVID-19. That’s a lot of money to lose. However, some experts believe that the real estate sector has a chance at bouncing back post-COVID, provided it responds well to the policies announced by the government to: contain the spread of the virus, revive the economy, and ease the burden on citizens. Let’s proceed.
Opportunities for the Indian real estate
Undoubtedly, COVID-19 couldn’t have made an appearance at a worse time in India. Nevertheless (and thankfully), even such grim situations have offered several opportunities for the realty sector.
China’s fallout with economies
Given that many economies across the world are looking to reduce their dependence on China, be it imports or manufacturing units-wise, India can offer them what they need. Skilled and affordable labour, inexpensive rentals and the likes may get global players turning to India for their business requirements. The only concern here would be that these economies may move businesses back home to bridge their employment gaps.
Falling stock markets, oil prices, and a volatile INR
Plummeting markets forced investors to sell their stock positions and park their funds in safer options such as gold. However, diving crude oil prices and a volatile Indian National Rupee (INR) have not released investor’s worries entirely. Coupled with falling property values, these factors attract investors in the commercial properties segment of Indian real estate—hoping to make decent returns—to park their funds in the real estate sector.
Besides, cash-starved developers may be forced to sell their unsold properties at discounted prices. As per PropTiger.com, there was unsold inventory worth ~Rs 6 lakh crore as of Mar 2020. Speaking of prices, Deepak Parekh, Chairman of HDFC says that the value of unsold residential properties may fall by 20%. Developments like these would attract opportunistic buyers or investors to acquire homes at lower prices and fuel the demand in the real estate sector.
Absence of a mandatory policy to waive-off or write-down rent
Speaking of rental properties, the government has not formulated any mandatory policy to waive-off or offer a concession on the monthly rent. To offer it or not is entirely up to the landlord. So expecting any kind of relief in this regard may be in vain, given rental income may be the sole source of income for some property owners. That is why experts believe that rental spaces may not take a huge blow due to COVID-19. A report by ICRA also suggests the same.
Irregular income due to lay-offs and salary cuts
The co-living segment of Indian real estate would continue to thrive given that many people may have a lower income, thanks to lay-offs and salary cuts. This opportunity also extends to the co-working segment of the real estate sector in India. After remaining shut for a long time, many companies and offices restarting their operations would look for ways to minimise expenses and ramp-up their profits. Co-working spaces offer them exactly the same. A place to work along with a host of services would not be bad for offices after all.
Lockdown and social distancing
Despite the lockdown, some developers found out a way to keep up their businesses alive by embracing the gift of technology. Well, all things digital have been picking up momentum since a long time, and that too quite rapidly. On top of this, the nationwide lockdown and social distancing only fuelled digitalisation. While some developers adopted virtual reality to chat with their customers, others used it to offer walkthroughs of their properties. Ergo, it would be good for developers to continue adopting technology in their business because customers would increasingly mind social distancing and would expect automation in the sector.
Disruption in the supply chain
If anything, COVID-19 has taught developers to have a sustainable supply chain model. A geographical-friendly supply chain would help developers in mitigating disruptions in supply that could result from natural calamities. Ergo, developers may look for alternative suppliers in close proximity to ensure the risk of supply would lower in a situation like this.
Financial relief for developers
The 3-month moratorium on loans not only relieves homeowners but also developers as it would address liquidity concerns in the short-term. In addition to this, the government has also allowed developers to defer project completion by 6 months, which will further reduce their burden of delivery on time.
Threats to the Indian real estate sector
Along with opportunities, a crisis also brings about threats. Below, we discuss the challenges that the real estate sector could face in the post-covid19 era.
Unavailability of labour
The lockdown has driven many labourers to hinterlands. With no prospective sources of income, many labourers have headed back home. This means, the real estate sector is currently dealing with a dearth of labour. If not addressed, the issue can translate into high labour costs, ultimately spiking the total cost of building. However, expecting immediate relief on this front would not be wise because labourers may take a while before returning to cities, given the severe burn they felt during the lockdown.
Loss of jobs and pay cuts
The centre had directed lenders to offer a 3-month moratorium to relieve borrowers of the burden of paying EMIs during the lockdown. This is now extended for 3 more months. The challenge persists, whatsoever. Due to lockdown, many people have faced lay-offs and pay cuts. Meaning, potential homebuyers would shy away from availing long-term high-value loans, ultimately hitting the demand for residential properties segment of the real estate sector.
High interest rates
The country had been facing credit crunch even before COVID-19. The problem with credit crunch is that lenders lack funds to lend, which forces them to offer credit at higher interest rates. This, then, becomes a primary reason for borrowers to refrain from availing loans. Ultimately, big-ticket investments like a home or a commercial property become unattractive for buyers.
But RBI has been rolling out various monetary policies including several repo rate cuts and TLTRO to address this issue and drive consumption. What repo rate cuts and TLTRO do is reduce the lender’s cost of funds, so they, in turn, can offer low-interest loans to borrowers. However, despite several rate cuts and TLTRO conducted, lenders haven’t been very prompt in passing on the benefit to the borrowers. If this continues, borrowers would refrain from availing loans and the real estate sector in India would suffer.
While it is too early to gauge the absolute impact of COVID-19 on the Indian real estate sector and also to predict how the future may look, the recovery of the realty sector is vital for the economy as a whole. First, the real estate sector has a multiplier effect on over 250 related industries. Second, but equally important, the real estate sector in India is the 2nd largest employer that generates significant opportunities. So, let us stay tuned to watch how a very critical sector of Indian economy responds to COVID-19.
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