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Home / India News / Recovering real estate sector slumps again amid lockdown to curb Covid-19 spread

Recovering real estate sector slumps again amid lockdown to curb Covid-19 spread

According to a CRISIL report, the fallout of Covid-19, weak orders spanning the last quarter of 2019-20 and the first quarter of 2020-21, and diversion of state funds towards healthcare, will weigh on demand growth, especially in the first half of the next financial year that would start from April 1.

india Updated: Mar 26, 2020 07:30 IST
Rajeev Jayaswal
Rajeev Jayaswal
Hindustan Times, New Delhi
Coronavirus update: Developers apprehend an acute financial crunch due to disruptions in payment cycles.
Coronavirus update: Developers apprehend an acute financial crunch due to disruptions in payment cycles. (Virendra Singh Gosain/HT File Photo)

The three-week lockdown to contain the spread of the coronavirus pandemic (COVID-19) will delay residential and commercial properties by three to 12 months depending on the scale, mainly due to acute shortage of labourers in the post-virus era. This would result in real estate developers evoking the ‘force majeure’ clause, experts and developers said.

Developers apprehend an acute financial crunch due to disruptions in payment cycles. They are expecting the Reserve Bank of India (RBI) to reduce interest rates, the government to give fiscal incentives and the sector regulator to condone construction delays, said executives working with leading developers, requesting anonymity.

This is bad news at two levels.

One, it adds to the number of stalled projects. In November, while announcing a Rs 25,000 crore alternative investment fund to help such projects, finance minister Nirmala Sitharaman put their number at around 1600 and the number of housing units involved at 458,000.

Two, it depresses consumer sentiment. Many of the consumers who have bought apartments in these units have invested a substantial amount of savings or taken out loans against them.

A recent “Report on COVID-19”, prepared by the Federation of Indian Chambers of Commerce and Industry (Ficci), said the pandemic had hit the real estate sector hard at a time when it was hoping to recover from a prolonged slowdown. “The health contagion of COVID-19 disease, however, has the potential to put some brakes on India’s real estate market, given the anticipated slump in demand,” it said.

“The real estate sector was already languishing because of delayed projects, inventory overhang, liquidity issues and a trust deficit between builders and customers. Now, construction activity has come to a halt across the country and sales have virtually dried up. Many small and mid-size [real estate] companies will face challenges in servicing debt and managing cash-flows,” an executive working for a leading developer said requesting anonymity.

Developers will take resort to the “force majeure” clause of the buyers-seller agreement and the Real Estate Regulatory Authority (RERA) will have no option but to condone it because the reason for the delay is genuine, he added. RERA is the real estate sector regulator and the “force majeure” clause permits deviation from the agreed contract, particularly from the timeline.

“Reorganising construction sites will be done from scratch. Getting labourers will be difficult as most of them have fled to villages. And, getting credit for construction materials will be also difficult,” he added.

National Real Estate Development Council (NAREDCO) president, Niranjan Hiranandani, said that with the lockdown in place, home seekers were facing the prospect of delayed possession, work had stopped at construction sites, workers were worried about their financial future, and companies, already facing economic challenges, had to deal with ‘no fresh inflow’ of funds, with sales having dropped to almost zero. “The regulatory aspect of RERA will see developers citing ‘force majure’ as the reason, and ensuring no action on delayed possession,” he said.

According to a CRISIL report, the fallout of Covid-19, weak orders spanning the last quarter of 2019-20 and the first quarter of 2020-21, and diversion of state funds towards healthcare, will weigh on demand growth, especially in the first half of the next financial year that would start from April 1. “Weak business sentiment and some issue of labour availability can also derail execution, especially on the urban side during Q1 fiscal 2021,” it said.

Gaurav Karnik, National Leader-Real Estate, EY India said that projects would be delayed depending on the level of completion. “RERA authorities need to look at the ongoing situation on projects and evaluate providing an extension for projects in view of current lockdown and the fact that workers at sites may have gone back to their homes and would take time to come back once lockdown lifts,” he said.

He added that there would be a host of other issues — from buyers deferring plans to buy houses till confidence returned in the economy to existing buyers, who had taken loans, facing difficulties in meeting their loan commitments. “RBI should also relook at classification of non-performing assets (NPAs) for the sector to tide over this crisis and restart the cycle,” he said.

According to Ficci, while the sector was taking all possible measures to mitigate the impact of Covid-19 on business such as deferring the house registrations and moderating sales targets, it needed government support, including concessions on taxes.

Global real estate consultant CBRE India, South East Asia, Middle East and Africa chairman Anshuman Magazine, however, said the impact of Covid-19 could be short-lived provided that the virus remains relatively contained in India. “Office leasing demand as of now has been unaffected due to a sustained appetite amongst US and EU based corporates for India as an outsourcing destination. However, the global impact could potentially result into delayed decision-making, curtailed capital expenditures, thereby slowing down portfolio decisions in the short term,” he said.

“On the positive side, health and wellness of employees could take centre stage for majority of the corporates; with greater focus on workplace hygiene, remote working policies and increased adoption of flexible space options,” Magazine said.

There are some developers who are undeterred by the temporary crisis due to pandemic, one of the experts mentioned above, said giving the example of Godrej Properties Ltd, which on Friday announced its entry into the Faridabad market with its residential plotted development.

Ankush Kaul, president-sales and marketing, Ambience Group said there is opportunity for buyers even in this crisis. “Past and current challenges so far have kept the prices under check. This has prompted the smart, discerning buyers and investors to go out in the market and seek deals and reap gains from the offers.”

“Amidst these challenges, looking from an investor’s perspective, this is a moment to ponder. Among asset classes, we have real estate as the optimum alternative: real estate still provides the ideal opportunity to grab good investment deals in a tangible asset,” Hiranandani said.