Real estate: Will demand for houses, flats increase post-COVID-19?

Various socio–economic factors, over the last few quarters, have impacted the real estate sector. Now, additionally, Coronavirus outbreak has also started showing its effect on the realty market. But, the big question lying unanswered here is - Whether demand for houses, flats will increase post-COVID-19? Nimish Gupta, Managing Director, Royal Institution of Chartered Surveyors (RICS), South Asia, sheds some light on this as he tries to answer and explain post-COVID-19 real estate market.

According to Nimish Gupta, "Market reports for the first quarter of 2020, suggest that ~78,000 ready-to-move-in units, valued at INR 65,950 crore are lying unsold. This amounts to almost 12 per cent of the 6.44 lakh units in cities, awaiting sale. While, there is no doubt that the COVID–19 pandemic has further damaged market sentiment, it is probable that unsold inventory will remain steady in the immediate future. This situation is likely to prevail till such time the situation is clearer. It is expected that developers themselves will hold-off on new launches or carry only limited launches due to the level of inventory overhang in the market."

Nimish Gupta adds, "While it has been suggested that developers cut prices in order to clear unsold stock, it is imperative to understand if the solution is market viable. There are key market dynamics at play, which need to be considered. Given the fact that the developers are already cash-strapped and besieged with tight liquidity, bringing down prices will only put more pressure on their already stretched margins. This will further impact business capability and continuity. Price reduction may result in housing stock being reduced in the short-term, but in the long-term, it will only be detrimental to the development of businesses and the future prospects of the sector. Moreover, the current provisions around the Income Tax Act prohibit the lowering of prices below the circle rates and can result in penalties to be issued against developers."

Buyer’s perspective

Further Gupta said, "Issues and challenges also exist from a buyer’s perspective. Even before the onset of the Coronavirus, consumer confidence had taken a beating. Taking into consideration the present conditions, a vast majority of people across sectors and salary brackets, are either more concerned with job security or fear salary cuts. This uncertainty will curtail large discretionary spends, even on essentials like housing. However, this has opened the doors to an alternate segment, in the form of ‘rental housing’, which is now very much in the limelight. This market segment holds a lot of promise and is expected to see further growth post COVID-19. Considering the all-round unpredictability and decline in disposable income, more retail buyers are likely to be seen investing in rental housing, over absolute property purchase. The large number of redundancies across industry and uncertainty in income, will prompt people to conserve cash and opt to stay in rented accommodation. An added feature will be the government’s recent impetus to arrange rental accommodation for the migrant workforce, which had nowhere to go as businesses were suspended and borders sealed, post the lockdown. These factors will further push the demand for the segment."

"The pandemic highlighted the problems faced by the migrant worker. A rental housing model which specifically caters to the needs and requirement of labor, should be implemented by developers to provide shelter to this segment of the workforce that travels inter-state for work. The Government has already taken a strong stand on the subject under the PM Awas Yojana (PMAY), which will look to extend much needed affordable rental housing to migrant workers and urban poor. In the urban scenario, as the ‘new normal’ settles in, concepts such as "Walk to Work" will also acquire greater significance. To a great extent, the course of rental housing, post the COVID era will be determined by such factors. However, these changes will need a more holistic approach and involvement of all stakeholders, as developers alone may not be able to service all requirement," opines Gupta.

Modi government's initiatives for real estate

Talking about Modi government's initiatives, Gupta said, "We have already seen the Government and regulators step-up and support the sector through various initiatives and stimulus packages. The Finance Ministry and RBI assumed a hands-on approach, as a consequence of the pandemic, in addressing the concerns of the industry and economy. It has swifty implemented measures and formulated new policies to foster favourable conditions that encourage cash flow. Since February this year, RBI has introduced various monetary measures to ensure demand is supported. A key high point has been the move to reduce repo rates by 40 basis points to 4%, along with the lowering of reverse repo rates to 3.35%. This highest ever lowering in interest rates will assist in assuaging the on-going liquidity problems of developers."

"In addition to this, the further extension of loan moratoriums by 3 months up to August 31, 2020 will help relieve the stress on them. Furthermore, the delay of interest on working capital loans to be repaid by March 202, should provide succour to the challenge of liquidity, encouraging investment and cultivating demand. Everyone will stand to gain, including the buyer and seller, where the former will derive the benefit of cheaper home loan EMIs," Gupta added.

"The government has not shied away from extending stimulus to boost the economy, in numerous ways. One of the key challenges that came to the fore during the crisis, is the ambiguity on contractual agreements. The insertion of ‘force majeure’ clauses provided relief to both developers and contractors. The construction sector too will get the required boost, with construction periods being extended by 6 months. This will entail foregoing the cost incurred for all government projects and easing global tender norms for projects under INR 200 crores," Gupta said.

Post-Covid 19 realty scenario

"Post pandemic, the revival of the sector will be gradual. On the road to recovery, restoration of demand will have to the primary and central focus. There are a few steps that can offer immediate relief in this area. Buyers should receive the repo rate benefits directly from the banks. Developers can consider alternative real estate asset modelling, from capital sale purchase to rental housing models. They should pass the benefit of increased tax incentive, through improved tax structures, to the consumer. Additionally, they should also look at Tier 2 & Tier 3 cities for growth," Gupta concluded.