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India’s Residential Sector: A Refreshing Narrative Change due to COVID-19?

5 MIN READApril 23, 2020
India is one week into its 21 day nation-wide lockdown, and the COVID-19 crisis is starting to have a larger effect on the country’s residential real estate sector. Uncertainty hovers over the market, and it seems like in areas such as Delhi, Mumbai and Pune, the lockdown will not end anytime soon. GRI Club members gathered in the last GRI eMeeting to understand how the residential sector will behave in the upcoming months and what solutions could help keep it afloat. Especially since these areas alone concentrate around 40-50 percent of the country’s construction activity. 

Main Challenges Encountered by Residential Players

It is too early and there is too little information to understand how the real estate market will perform. It is important to analyze the overall Indian economy. Yet, every cloud has its silver lining and there are some positive factors for the residential sector. For instance, interest rate reductions have led to reduction in home loan rates Members also believe that following the WFH mode , there will be a shift in consumer needs, and people will want their self-owned property with good standards and facilities.

Liquidity is one of the main issues industry players are facing at the moment, and it will remain as the main issue for the rest of the year. For residential units that have already been sold, developers will face the challenge of not receiving payments due to the EMI holiday. In April, liquidity will be deployed into the bond markets, which once cooled off will shift to the high yield markets.

Funding will be a challenge with the reduced NBFCs figures, which would constitute 50-60 percent of the lending. Lenders  on the other hand would shift over to project finance and determine the salability of the units. At the moment, there is no liquidity flow from PSUs to NBFCs. There is a need for PSUs to lend money to the NBFCs at much cheaper rates such as 5-6 percent, as the long-term repo rate of 4 percent is available with RBI. This would then be passed on to the developer at cheaper rates to help complete the project. The reduced home loan rates however are not being passed on to the home buyer as the cost of capital for NBFCs is very high. A three-month moratorium period has been provided, however it is not available to NBFC to replay banks. Land is likely to become cheaper if land costs are rationalized. 

The general sentiment of the members was that this crisis will bring change to how the industry and the world was doing things before. Members believe this experience will bring innovative financing products to the market, as well as new technologies for construction. They are confident that the market will recover, but the pressing concern is the decline in job security. 

As the situation grows more complicated, some industry players will not be able to keep up with the demand, and there will be an increase in consolidation. Members do not expect credit to dry up in the residential sector, and they believe that India may be a favored market after the lockdown as debt investment in India real estate is more favorable over long-term equity investments. 

Great Lockdown vs 2008 Financial Crisis: How will the impact be different on the Residential Sector? 

Members discussed how the residential sector was impacted during the 2008 crisis to find similarities or differences as to how it is behaving in response to COVID-19.
  • According to members, valuations were overheated and pricing was unrealistic back then, while today there are more realistic prices in the market. 
  • 2007 and 2008 were high seller’s markets whereas this time around, it has been a buyer’s market. Home loan rates in those periods had increased to 9.5 percent and today, India has rates of 7.5 percent. 
  • During the last crisis, FDI injected money into the residential sector where 125 funds purchased 100 acres of land in Ludhiana, 50 acres in Madurai, 75 acres in Visakhapatnam. This time, FDI inflows have shifted toward commercial and value-added offices spaces. 
  • There was a large concern that speculators controlled the market back in 2008-09. Today’s market is an end-user driven market. 
  • Developers have realized their mistakes regarding right sizing and right pricing. In the last crisis, more emphasis was placed on developing luxury apartments with four to five bedrooms. Today’s market has shifted to more affordable housing projects. 
Overall, members agreed that the bond markets were far more volatile back then and that the pain experienced during that financial crisis was far more structural. Today’s market has more favorable tax policies, particularly for affording housing, that did not exist in the last crisis. Members believe there will be potential for foreign investments to come into India. However, a concern that arises is whether the market offer right after valuations will be attractive for equity investors. The country’s historical problem in the residential market is that there are few equity investors, as well as equity providers. Investors look for stabilized land prices and once land prices come down, equity players will want to come in. However, the quantum of equity investments is uncertain as the investors are also currently starved of capital. 

COVID-19’s Impact on Housing Sales

The sector is trying to understand how this crisis will impact residential prices in India. Members discussed the numbers of their own projects. A member began by saying that they had booked 500 units in the last 15 days of March. Projects during Gudi Pawda and Ugadi have seen encouraging numbers too. Another member has received 34 bookings for an apartment complex launched only two or three days ago, and expects to receive at least 100 more of the 350 leads that had shown interest. 

Affordable housing projects have also sold 40 units in Kalyan-Dombivali, 9 units in Thane and 3-4 units in Parel during the lockdown period. All of which were sold online. Sales in NCR and NRI have also been recorded but there have not been huge volumes. The concern among members is that these sales are all leads generated before the lockdown, and they are not generating any new leads during this period. As the dollar depreciates against the rupee, there seems to be great potential in NRI sales again in India. There is also a concern regarding the de-globalization where people would shift back to their hometowns. The current numbers are encouraging, but the question lies as to how sustainable these numbers really are and if they will continue in the next few weeks. Once the lockdown is lifted, members fel that sales would occur however not at the same levels. 

Due to the low number of sales in the lockdown period, developers are adapting price strategies to help boost consumer confidence. The interest generated has been mostly in projects where a minimum price protection is given to developers. Another tricky situation for sales during this period is that upfront payments made by buyers are less than they were prior to the lockdown.For developers to boost sales, they are now accepting lower upfront deposits.

Changes in Consumer Needs 

Members believe there will be changes in consumer trends after this crisis. At the moment, the need for a self-owned house has been rising. People that were before moving toward the co-living rental properties are now moving away and are pondering owning a house.  Another factor that has pushed this change in mindset is that with the quarantine, many landlords have not allowed people to occupy rented properties, spiking the numbers in prospective buyers. Nevertheless, these buyers will contemplate the purchase due to job insecurity that will prevail due to COVID-19. 

There has been an increase in demands for the government and HFCs to create a product that will help these prospective buyers and provide them more comfort in terms of job security. Members see this product with a moratorium for EMI payments or subvention of approximately 18 months or two years with a 30 percent upfront payment. While developers should continue to cater to these needs by generating more affordable housing and middle-income projects. This situation has increased the need to think of out-of-the-box solutions. There will be an increased demand for housing units and buyers need to be persuaded to take loans, even though challenges may arise later. 

Construction Halt’s Impact on Local Economy 

At the moment, of India’s 600 districts 200 are in the impact zone, while 400 remote districts are not.  This has raised various questions among GRI Members: 
  • How can we reactivate activity in these 400 remote regions that are not under the effect of COVID-19 in a way that the country’s GDP will not be impacted? 
  • How can these regions be protected and blocked off from the rest? 
  • How do you move goods and services across these boundaries without further contamination? 
  • How can construction continue in quarantined districts and how would companies get construction materials onto the sites? 
At the moment there is labor in some of these quarantine areas, for instance Mumbai has to get ready for the rainy season, therefore there are road repairs, drainage cleaning and other small works being done. These workers are grateful to be employed during these difficult times. Another issue that must be addressed is migrant labor of those that had left to go back to their homes, but were trapped in the quarantine. Members believe that by the end of April or early May, construction activities will restart. 

The government is conscious that not everything can stop and are looking for the best ways possible to reopen construction activities. But for this to occur, liquidity will need to be pumped into construction finances to make sure it can kick off on the right foot. There is a possibility that the price of construction will be reduced, with the large inventories in steel and cement. However, the seamless supply chain should be reinstated when the lockdown is lifted, tapping into its full potential for lower costs. 

Government's Role in Re-Activating Construction Activity in India

The government’s biggest concerns today are stopping the spread of COVID-19 and generating employment. The good news for the industry is that the real estate construction sector has been identified as one of the two possible sectors that would kickstart activity. Members feel that the current state of affairs is far worse than that experienced in 2008 and that the active involvement of the government will be crucial. The focus should be on generating jobs, moving goods and protecting the health of the population. So far, the government has been keen on providing a stimulus to the construction industry as it is the second largest employer after agriculture. 

However some members feel that the industry may not be prioritized as it should. The government charges and levies would need to be decreased along with interest and penalties for this to work. To boost the demand of residential units, a suggestion made by members was that PMAY schemes are made available to all buyers and not just first-time home buyers. Also that the subvention that was earlier banned by NFHP would again be provided to developers. Members are also expecting a one-time restructuring, as the government is confident that RBI will permit the one-time restructuring. The ask for reduction in GST rate might not be approved by the government, however ITC may be allowed. The ball is in the government’s court  to help the sector and boost the overall economy, they have the true power to make sure the country can overcome this crisis.
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