Market and Industry

Real Estate: The unfortunate performer

For the first time in a decade after the financial crisis, India’s real estate market is estimated to see a 20% price decline across the industry, as the coronavirus pandemic continues to halt economies to operate. Let’s analyze some facts and arguments by industry leaders to check this thesis.

As markets tumble and the empires fall, new opportunities come to light. But in these mad times of COVID-19 pandemic, everything seems to have lost hope, at least for a couple of months. Real estate is one such malnourished industry who after all had its corrections post demonetization, GST and economic slowdown, is on its knees having a bleak future and the only certainty is the uncertainty.

According to market experts, housing sales across the top seven property markets in India are likely to witness a 25-35% year-on-year drop in 2020, while absorption of office spaces is also likely to dip 15-30% owing to the impact of Coronavirus pandemic.

Given that the nationwide lockdown has completely halted construction activity – project delays could run into several months for well-funded projects and a couple of years for others.

According to the reports given by Proptiger, an online real estate platform, the market has an unsold inventory of about 6.1 trillion rupees with a total outstanding loan of about 4.5 trillion rupees. The only good news here is that the unsold inventory has seen a 12% decline as compared to last quarter.

The report also shows states having more than 50% inventory under the 50 lakhs bracket, which is going to make properties bleed as Mumbai and Pune have been declared hotspots and therefore resuming activities in these areas in the forthcoming future is no more than fiction. As a result of this, States have been providing an extension to the projects. UP-RERA has extended the validity period for registration of projects by 3 months as a support measure.

Experts say that the present scenario of a national lockdown is unprecedented. The global financial crisis marked a financial meltdown, but the COVID-19 lockdown has a human angle to it which differentiates it from the former. With uncertainty looming over jobs, salary cuts, and future cash flows, big-ticket discretionary purchases would be the last thing on the buyer’s mind. Therefore, the demand is likely to be affected by it, But there’s also a ‘Bahubali’ task that is yet to be undertaken.

By FY 20 nearly 500,000 units were required to be delivered, but only 25% of the units were delivered. This schedule lag is likely to affect the coming projects as the burden over real estate grows. The cash flows of developers are going to get affected amidst the NBFC crisis as they provided loans to the real estate sector. A recent example of the crisis being DHFL which went into bankruptcy, the previous year.

The stock markets have been a clear indicator of the condition the Real estate sector is in. The Nifty Realty index has fallen 48% since February on news of the coronavirus outbreak, sharper than the Nifty 500 index that fell about 33% during the same period and it continued to drop even after the stimulus provided by government and RBI to the economy as real estate sector was neglected as compared to other sectors and the market remained unhappy about it.

While the talk of the town is this, there are several others who oppose this notion stating some facts and arguments, who state that prices will rise and remain stable, rather than declining, post COVID-19.

Experts say that ‘Make in India’ program might get a boost from this difficult situation in the medium to long term, but short-term pains for developers are inevitable. And dropping prices in a scenario like this is hardly an answer to the situation. On the other hand, to make it attractive to the buyers, the government might launch measures and invest in property.

Another leading expert states that It would be too early to predict the extent of price change in the near-to-medium term. Depending upon the duration and depth of the current crisis, prices may or may not see a downward movement as the holding cost of the developers will go up, while the pressure to liquidate unsold inventory will increase.

In the above-stated arguments, there’s a ‘man-sized if’ being used to oppose the price decline. In my opinion, the facts proposed are not much concrete then what the data have so far indicated. Promising on Make in India is an assumption which in the past have been proven wrong. Many experts say that this would shift people’s reliance on real estate more as an opportunity to preserve and earn because of the failing markets. But the ailing sector would first have to perform in order to give birth to this expectation. And as the roadmap lies ahead this is a farfetched dream.

The real estate sector in order to meet up with the debt burdens and lure buyers would have to decrease their prices if not 20% but up to 10%, to instill confidence to invest in the second largest employment sector of India. With a 25000-crore stimulus from the government, more investments need to be put into to minimize the loss incurred on investments made. Developers would have to step up on the occasion for this, utilizing the liquidity infusion by RBI. They need to resort to banks and other trusted sources as against NBFCs and aim for a longer-term engagement rather than a short one at a higher interest rate.

Property prices will likely decline in the near future but eliminating other variables would be a mistake. With COVID-19 pandemic spreading its wings through the calendar any result is possible but given the current circumstances and stance by the government, real estate is expected to see a price decline. This correction nevertheless would be beneficial for the sector as the investment would certainly boost the lending sector and ultimately provide employment opportunities in the economy.

About the author

SHIVAM GUPTA

SHIVAM GUPTA

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