Home Spotlight Will real estate prices drop?

Will real estate prices drop?

Residential real estate has been one of the worst sufferers of the COVID led lockdown. Most of the real estate companies failed sell any units during the lockdown which was almost extended for two months. Even before the lockdown, the sector was under influence of demand slowdown for last few years. And the lockdown has given a deathblow to the industry and now we have to see how the industry will come out of this problem. Most importantly, prospective homebuyers are eager to see the impact of lockdown on the property prices.

The Minister speaks for price reduction

Mr Piyush Goyal, Union Commerce Minister, in a webinar arranged by NAREDCO had said “We will try to provide some concession on ready reckoner rates. Even if we (the government) are not doing anything, you have to sell (the unsold inventory of housing stocks at reduced prices).” He firmly believed that the realtors had no option but to reduce the prices. A similar view was expressed by the minister of Road Transport and Highways, Mr Nitin Gadkari earlier. Mr Goyal said in the webinar that just because the realtors had bought land at higher prices, the government cannot help them to hold on to their inventory till the market improves. “Market is not improving in a hurry,” the Commerce Minister said in the webinar.

CII president too believes so

Seasoned banker Uday Kotak, who is now the new President of the Confederation of Indian Industry feels that the real estate sector needs to ‘re-imagine itself’. He is also of the opinion that in order to see the revival of demand in the housing sector, the developers would need to lower the clearing prices. “Very clearly price for real estate could be the single biggest opportunity for the revival,” he said in an interview. He firmly believes that just because the developers had bought land at higher prices they cannot expect the home buyer to pay for it. He doesn’t expect the government to come to their rescue and help them to hold on to their inventory – a view similar to the one expressed by Mr Goyal a few days earlier.

From these conversations its clear that everyone except the real estate developers believe that the present ruling real estate prices are on the higher side and it has to come down. More importantly, the government feels the prices are high and they have to come down. It also shows the waning real estate lobby among the power that be at the centre. It may also mean that funding may not going to be easier for the sector even after the announcement of government’s stimulus package post lockdown.

There is a strong feeling among the real estate analysts that the prevailing price is unsustainable and the prices have to come down, though the extent of correction may differ from region to region. “The more you hold onto the price, the longer will be the slowdown,” said the analyst with a foreign brokerage.

Optimists give China example

However, there are some optimists who feel that prices will rebound sooner than later. They give the example of China. China was the first country to go into a lockdown with Wuhan shutting down from January 23, 2020. This was followed by similar measures in over 80 cities. As per the National Bureau of Statistics, China, after tumbling in Jan-Feb, housing sales decline moderated in March. Housing sales by value for Q1CY20 were down 23% YoY as compared to 35% fall in the Jan-Feb period. March 2020 has witnessed good recovery in the housing segment in China. According to  data from E-House China Holdings on 27 major cities, new house sales tripled in March on a month-on-month basis. Optimists feel that such recovery can happen in India too.

DLF changing its strategy

However, some big real estate players are tweaking their strategies to remain afloat in the changed scenario. For example, DLF, one of the largest realtors, has decided to renew its focus on mid-income projects in Gurugram in the coming months. Also, the company, going ahead, will launch the project as soon as the construction begins. Earlier, the company used to launch its projects only when they have achieved a substantial degree of completion. The new strategy will allow the company to fast-track the launch of those projects which had to wait due to lockdown.

Consolidation is happening

Whether lockdown or no lockdown, the industry was already in consolidation mode, since last two years, in favour of large, organised developers with a strong track record of execution and fortified balance sheets. The pace of consolidation may pick up in the coming months and the small and marginal players may be completely wiped out in the process. The moratorium on principal/interest payments for developer and housing loans coupled with reduction in interest rates may bring marginal relief for the beleaguered residential market but that may not be enough save the industry.

The process of price correction is a good news for the prospective home buyers who may be waiting for that to happen since last few years. Even the government may want that to happen as the property prices had risen too fast and too steep. On the other hand, what is worrying is the impact of the present disruption on employment generation opportunities in the sector which is one of the largest employers of unskilled and semi-skilled labour in the country. The country is already reeling under poor employment generation in last few years and the upheavals in the real estate industry (future, if not present) may only contribute to the further deterioration of the job market. That may be the last thing one would have expected in the present circumstances.

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