Home Blog COVID punctures revival hopes of realty sector

COVID punctures revival hopes of realty sector

The downcycle in Indian residential property sector seems to be unending and perpetual. Now in its seventh year of downcycle, the sector has seen multiple rounds of disruptions over the years like demonetisation in 2016, enforcement of the Real Estate Regulatory Act (RERA) and GST in 2017 and then the NBFC funding crunch from late 2018 onwards have all derailed any attempt to revive the sector. Recent COVID inflicted lockdown and complete breakdown of market system (though temporary) has come at the most inopportune time for the industry. In the beginning of the year the industry was showing the signs of revival until the virus struck the sector. Past disruptions have driven waves of consolidation in an otherwise largely unorganised sector. This disruption too may result in further consolidation of the sector.

As a result, revival may be delayed, some may go bankrupt, some assets may turn bad and more worrisome will be the loss of jobs – mainly for unskilled and semi-skilled labour. Loss of jobs would be the greatest threat as the nation is experiencing highest degree of unemployment post lockdown. Prevention of loss of jobs may be difficult but efforts should be made to provide alternative jobs for those unfortunate ones elsewhere.

The primary reason for demand slowdown was rise in the property prices too sharply and steeply. It’s a natural phenomenon that steep rise in the price is followed by unaffordability and then demand slowdown. When demand slows down either of the two will happen – price will go down to the level as expected by the home buyers or will stagnate at a level till the affordability of the home buyers improves. In Indian real estate market perhaps the second option was emerging though slowly but that was punctured by the COVID breakout. Had the first alternative happened, revival would have been much faster but that didn’t happen due to strong holding power of realtors. As a result, one had to experience prolonged  demand slowdown accompanied by price stagnation.

The impact of repetitive disruptive events has primarily impacted the cashflows of developers. Customer preferences have shifted to completed apartment projects and also RERA regulation makes it tougher to divert ongoing project cashflows for expansion. Meanwhile, the NBFC liquidity challenges have constrained the amount of funding available for the real estate sector. And outbreak of COVID is perhaps the last nail in the coffin.

In the last seven years or so, property pricing has significantly underperformed the broader per-capita income growth as well as CPI. Mortgage rates are presently at all time low. Though the unsold inventory is mounting in last few months we haven’t seen many new launches and therefore, unsold inventory level should go down from the current level. However, what is worrying the most is the financial condition of potential home buyers which might have turned weak due to poor economic condition and uncertainty about job security.  Because of the lockdown and possible economic contraction last few years gain in affordability of the home buyers might have come to a naught. This again puts the real estate sector under a cloud of uncertainty.

Present demand slowdown with all related problems is worth the salt if it results in transformation of the sector which is consolidated leaving fewer but reliable players in the field. Greater administrative reforms should increase the transparency in the system which hitherto was lacking. Reliable realty companies with comfortable networth on the one hand and satisfied home buyers on the other operating under the hawk eyes of the impartial and unbiased RERA would be an ideal situation which we hope to see in the coming years.

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