INDIAN REAL ESTATE INDUSTRY ANALYSIS – COVID19 CRISIS
Article By- Nikhil Agarwal
AMIDST THE COVID19 CRISIS, THE INDIAN
REAL ESTATE INDUSTRY BRACES ITSELF
FOR A MASSIVE SUPPLY - DEMAND
CHALLENGE
The world is struggling to cope up with the effects of
the pandemic. The Indian economy also seems
dangerously close to a recession, and we deep dive into
the issues faced by its virtual backbone - the real estate
industry. The sector which was reeling under the
pressure of a liquidity crisis may now see lower
demand in the short term. Housing sales in the first
quarter of 2020 plunged by 42% over corresponding
period in 2019.
Increasingly restrictive measures on people’s
movement and the lockdown has stalled construction
activity temporarily. We analyze the overall condition
of industry stakeholders & discuss the steps needed to
make amends to the situation.
Industry
Real Estate, as an asset-class has historically offered
high returns to investors, and has rarely been devalued
as compared to other asset classes, even in times of
such crisis.
Market sentiments are expected to be low during such
time. Contracts will be subject to force majeure
enforcement. Huge unsold inventory is still available
with developers and many are hit due to cash liquidity
issues. The retail commercial space comprising mainly
of mall operators will be impacted in a major way.
Majority of buyers in the residential market could now
be first time home buyers. Demand should pick up after
the next few months of slowdown.
- Reduce project delays - Project delays are likely to
happen and can be avoided to some extent if banks
put in money and capital into stuck & distressed
projects on priority
- Promising long-term deals - Smaller number of
deals and bidding pools will be prevalent in the
market in the short term and lucrative promising long
term deals for future should be encouraged
- Avoid too much discounting - Re-pricing of project
sales might happen at the cost of profitability; hence
any abrupt re-pricing should be avoided and
frameworks can be established by the government
- Government Schemes - Improvisation of Pradhan
Mantri Awas Yojana scheme by better utilization of
funds and benefits to be passed on to home buyers in
affordable segment
- Economy Stimulus - The government can look to
improve the overall levels of savings and
investments to stimulate the economy during this
time of crisis.
10th April, 2020
Supply Chain
Over 500 industries are directly/indirectly associated
with real estate industry including civil materials –
cement, sand, steel, chemicals; MEP materials
including plumbing, fire, electrical, mechanical system
providers; finishing materials including flooring,
sanitary ware, paints & coatings, lights, etc.
- Support associated industries - Government
should look to improve liquidity and support these
associated industries; supply chain for industries
associated with real estate should be improvised with
better movement of goods and higher liquidity
- Phase-wise support to critical projects - Projects
can be analyzed based on execution phase and
supported based on criticality & time-bound activity
People Productivity / Labour
Availability of labour will be a big concern during the
lockdown period and many days thereafter.
- Central & state labour department collaboration
- Human resource development authorities should
work with the labour unions for motivation of
labours to join work and ensure safety standards;
- Timely payments & transfer of benefit schemes to
workers to be ensured during/after the lockdown
- Better work from home practices - Standard
operating procedures for working from home
- Improvement of partnerships – Project owners,
tenants, joint venture partners, investors, can look to
rework and collaborate during this time of crisis.
Technology
- New project approvals - Faster turnaround for
approvals of projects in state departments and
corporations through use of technology
- Digitalization - Use of digital medium for storage of
data, files, records at courts and personal level
- Work from home infrastructure - Use of business
accounts for video conferencing and efficient
methods of doing business – for better work from
home practices
- Use social media – as an effective marketing &
educating tool
- Banking technologies for real estate refinancing -
Better technology at banks for approval & sanction
of projects for re-financing
Finance / Funding
 INDIAN REAL ESTATE INDUSTRY ANALYSIS – COVID19 CRISIS
Article By- Nikhil Agarwal
Availability of finance and liquidity through banks will
be a concern. Prices of raw materials and cost of
funding may rise, thereby increasing costs and
reducing margins for developers. Higher working
capital may be required for purchase of materials on
cash payment basis as required by vendors in such
crisis
- Higher liquidity & Availability of funds – Banks,
under the relaxed norms of government, should
allow higher liquidity to developers; Setting up of
SWAMI fund by SBI Capital was a first good move
- FDI Investments - foreign direct investments in real
estate projects to be boosted by government
- REITS funding – Ease of access to capital for
developers through REITS while listing on exchange
- AIF Funding - Norms for setting up and release of
fund from Alternative Investment Fund to be eased
- Costing & cashflows rework - Increased operations
expenses may result in higher costs for developers,
and cashflows of projects to be reworked
- Lowering of Interest rates - Banks should pass on
the benefit of lower interest rates announced by RBI
to consumers
Taxes & Duties
The implementation of changes in GST norms for
developers had increased costs and business model
calculations for developers. Other taxes, fees & duties
are also a huge cost & burden for developers.
- GST inputs - The GST department & government
authorities may look to rework the costs increased
due to levies of GST while procurement of goods and
services in Real Estate
- Relaxation on ULC /Property tax- ULC penalties
can be lifted in the states that still have such laws for
easier norms of development and land holding
- Stamp Duty reduction - Registration & stamp duty
should be reduced by the states
Logistics
Timely movement of material from industries to
construction sites is a challenge at the moment. Cost of
raw material in construction may go up in the short
term. India is a big importer of construction equipment,
plastic, etc.– that will be highly impacted
- Relaxation of timings for Construction material
movement – Proper facilitating of movement of
vehicles during the lockdown & recovery period
- Imports after lockdown – Facilitation of imports of
cheaper construction material from countries
including Vietnam, Japan, etc.
10th April, 2020
- Better Infrastructure – Road infrastructure can be
planned so that tier 2 & 3 cities are able to obtain
better access to quality material in a timely manner
Social
- Health & safety of people – Strict norms for
movement of people at construction sites,
implementation of work from home as possible.
- Changing consumer buying behavior – Social
distancing norms might have to be incorporated in
sales & marketing process
- Good hygiene - Sanitization facilities, food options
availability and other critical supplies have to be
taken care of at construction sites & offices
- Property management - associations of residential
buildings and offices should have established norms
for movement and activities within the premises with
focus towards health and hygiene
- Insurance companies collaboration – Insuring
safety of workers and people in the team
Administrative & Legal
- Invoking force majeure – Contracts by Developers,
allottees, owners, lease/rental contracts will be
subject to force majeure and re-negotiations
- Norms relaxation by RERA / local sanctioning
authorities – Project periods should be extended by
RERA / local state bodies; Project sanctioning norms
can be relaxed by local corporation bodies
- Faster Project Approvals - Faster turnaround times
for approvals in state departments & corporations;
revenues will be generated for state bodies as well
- Efficiency & Technology - Use of technology and
transparency in liasoning process with state
departments, corporations and banks
- Framework for rental / lease norms should be
provided by concerned authorities to avoid defaults
Conclusion
India may witness a slowdown in the current and
coming quarter, however, it stands to benefit post
recovery. The silver lining is that the developers are
able to shed unsold inventories now. Phase-wise
manner for re-starting business and stimulating the
economy for demand improvement in the short term is
highly important to survive the real estate industry.
Article By- Nikhil Agarwal
Shivom Realty, Kolkata
B. Tech, IIT Kharagpur & MBA, ISB Hyderabad
Contact - nikhil@shivomrealty.com; 9836464926