Impact of the COVID-19 pandemic on the real estate industry
The coronavirus pandemic has no doubt, changed the gears of working in the world economy. Right from aviation and tourism to retail and real estate, all industries have been impacted in various ways. The lockdown declared to contain the outbreak of the infection has brought economic activity to a halt. The major sectors affected in India are MSMEs, tourism and hospitality, aviation, automobile, and real estate. Prior to the pandemic situation, the real estate industry was adjusting to various structural changes and other reforms introduced by the government. Combined with the COVID-19 pandemic, it has been impacted further. It was projected that the contribution of the real estate industry is set to rise to 13% of the GDP by the year 2025. However, in the current scenario, any projection of growth in the contribution to the GDP will not hold true any longer.
According to a study by Proptiger, housing sales have slumped by 30% across 9 major Indian cities in the period October-December 2019. Let us further delve into understanding the impact of the pandemic on buyers and developers.
Impact of the coronavirus disease on the real estate market
By and large, the industry has witnessed a slowdown in the progress of projects under construction and delayed buyer decisions to purchase properties. A few of the challenges faced are the industry are the migration of workers, liquidity crisis, and disruptions in the supply chain for building materials. Additionally, the sentiment in the market has become worse in recent times. A survey by Knight Frank India has shown that 42% of the respondents feel that the next 6 months will see no new supply being added to office estate and that the increase in rental housing value is also not expected any time soon.
In terms of demand for commercial real estate, businesses are postponing leasing decisions because of the ‘work from home’ norm that has become prevalent now and may continue for the next few months. Retail real estate has also seen a fall because of the decrease in global demand from consumers and hence, a pause on expansion activities by brands. In light of these circumstances, the government has announced a high tax break and set up a relief fund to the tune of 25000 crores for projects that are on pause and lower interest rates on home loans to incentivise people to make purchases.
Let us now look at how the pandemic has affected the different stakeholders.
Potential buyers who were considering initiating the buying process or were in the midst of it are postponing their purchases until after the lockdown because of the stoppage of site visits and the uncertainty around job security. This is despite the fact that the government has taken measures to improve purchases like lower home loan rates and a greater tax rebate. The sentiment in the market is quite low currently and is likely to improve only in the medium to long term. In order to continue property search safely in this period, buyers can start shortlisting them online on real estate portals, make use of the Augmented Reality (AR) and Virtual Reality (VR) tours of properties offered by builders and use the portal for RERA in their state to check the state of clearances. A survey by 99acres has also revealed that around 60% of buyers would prefer to try out virtual tours to finalize their purchase and 60% of them were planning to purchase homes within a year.
With the issue of unsold stock and delays in procuring the building materials for projects, the construction process and sales together have come to a halt, affecting the revenue of the industry. Considering that the industry was already reeling from the impact of the structural reforms and liquidity crisis, the lockdown due to the pandemic put the market at a further disadvantage. Firstly, many real estate developers are already taking precautions while showcasing their flats such as temperature screening and checking travel history. Additionally, virtual interactive tours of projects have been introduced to give prospective buyers an experiential feel of the site. It is important for developers to keep their website updated with the latest developments in projects, comply with RERA, and answer public queries online to ensure transparency. A few of the measures that the government has taken to provide relief to developers include-
- Reduction in the repo rate by 75 bps, reverse repo rate, and cash reserve ratio by the RBI will help lower the cost of borrowing for the real estate sector.
- The Centre has urged the state governments to make use of the 31000 crore relief fund for the construction workers.
- Increase in the threshold for the initiation of proceedings under the Insolvency and Bankruptcy Code (IBC) 2016 from 1 lakh to 1 crore. This will help track the frequent insolvency procedures against developers.
The Road Ahead
The next few months, unfortunately, look bleak for the industry because of the demand slump, poor market sentiment, and disruptions in the supply chain. Though the government has introduced relief measures that are sure to be beneficial, unless the market sentiment picks up and the pandemic subsides, it looks like the situation is not going to change too much. Hopefully, the industry should be able to find ways to look beyond the pandemic and plan to bounce back accordingly.