Real Estate, one of the largest job creators and a significant contributor to India’s GDP, has been grappling with a slowdown even before Covid-19. The growth in the industry slowed due to issues like supply overhang, the NBFC crisis and events like demonetization, introduction of GST etc, though some of these initiatives (GST and RERA) are beneficial in the long run. Recognizing the industry issues, Government of India (GoI) introduced various measures like, Housing for all by 2022 - Pradhan Mantri Awaas Yojana, Rs.25,000 crore Alternative Investment Fund to support last mile funding, Tax deductions and exemptions to a section of home buyers and developers, Introduction of Real Estate Investment Trust (REIT), Enactment of RERA etc, to support the sector.
The 60+ days lockdown, as a result of Covid-19, has changed the complete economic scenario with immediate repercussions such as stoppage of all construction work due to reverse migration of labour and raw material supply disruptions as well as drop in sales. Even when the lock-down is being lifted in a phased manner, the availability of labour will remain an issue as the threat of infections would remain and the labourers would get engaged in agricultural activities. This would lead to delay in project as well as increased costs. Besides, given the current scenario new launches will be on hold as developers would aim to complete the ongoing projects and liquidate inventory. Also, the extension of registration and completion date of projects by six months would help developers to tide over construction hiccups in lockdown phase.
On the demand side, though the sales remained largely muted during lock-down, there were exceptions wherein the sellers who adopted more innovative ways like – using digital media for site visits, incentivizing references from existing buyers, gift schemes etc recorded some traction. In some parts like NCR region, the developers have seen renewed interest from NRIs mainly due to uncertain stock markets as well as favorable USD/INR exchange rate. Besides, GoI’s announcement to extend the Credit Linked Subsidy Scheme (CLSS) till March 31, 2021 is expected to support the demand for affordable housing segment.
With Covid-19 forcing people to adjust to the new normal of ordering consumables at their doorsteps as well as work-from-home, the commercial and retail real estate have been hit hard. Even if the lockdown is being eased out, the fear of getting infected would keep people away from the crowd such as office and malls / theaters till we have an identifiable solution (vaccine) against Covid-19. This will result into slow and prolonged recovery into the commercial (with many corporations already announcing work from home as a new normal) and retail real estate. Though the 2nd round of moratorium is expected to give a required breathing space to these segments to stabilize since the lifting of the lockdown is being done in phased manner, any prolonged recovery might need additional support to these segments – may be a “one-time debt restructuring”.
With rising costs, plunging demand and limited sources of funds (due to reduced risk appetite of NBFC and HFC sector) the real estate sector is expected to continue facing liquidity crunch. In such a scenario, liquidating inventory with some bit of haircut in profits would help to ease out liquidity pressure. The developers would be better-off releasing the inventory without holding on to the prices, as there will always be a buyer for the rightly priced project.
We, at MP Financial Advisory Services LLP (MPFASL), are of the opinion that the overall demand, across segments, would be muted given the prevailing Covid-19 uncertainties which has led to reduction in CTCs, job losses and reduced earning potential for many. However, the projects which are attractively priced and providing good amenities would find buyers, as the buyers would like to make most of the opportunities available, the latent demand.
The stage of construction of project, developer’s reputation, competitive pricing, innovative ways to sell (like virtual site visits), would help developer to clear the inventory. From a credit risk perspective, projects at advanced stages of completion having shown reasonable sales velocity would be viewed more positively over a project at its initial stage of construction. However, the availability of elongated moratorium as well as comfortably spaced out repayment structure would also ease out debt servicing pressure, even if the project is at initial stage. Besides, Real Estate being a micro sector wherein demand and pricing varies according to location / locality of the project, the credit risk would vary and depend on various factors such as – combination of projects in the balance sheet, stage of projects, committed collection from the sold-out inventory, fund tie ups, availability of moratorium as well as spacing of debt repayment, developers brand recognition and past sales traction.