COPING UP THE CRISIS- HIGH SUPPLY AND LOW DEMAND OF GOODS
The outbreak of Covid19 has not only infected lakhs of people globally, but has also disrupted industries, trade and business cycles, faltering global economic activity significantly. After demonetisation, real estate prices did fall in India and lakhs of homes are waiting to be sold. Many property developers have gone bankrupt.
The real estate sector in India had already been stumbling from the adverse impact of liquidity crunch, high inventory overhang, weak affordability and subdued demand conditions. Now its miseries are likely to worsen, resultant of the outbreak of this pandemic.
Globally, no industry or market has remained unaffected from the ill macro-economic and social effects of the coronavirus outbreak. Nationally, the situation remains uncertain and the real estate sector too is in an unpredictable state.
“The present scenario of a national lockdown is unprecedented. The global financial crisis marked a financial meltdown, but the covid-19 lockdown has a human angle to it. With uncertainty looming over jobs, salary cuts and future cash flows, big-ticket discretionary purchases would be last thing on the buyer’s mind,” said Murtuza Arsiwalla, associate director- equity research, Kotak Institutional Equities.
The covid-19 lockdown will further adversely affect the housing sector that has already seen a rise in unsold inventory of houses across leading cities in the country.
Anarock Property Consultants expects an annual decline of 25-35% in home sales (top seven cities) in 2020.
A reality check on real estate prices in India is often estimated through a process known as ‘time correction’. Time correction refers to a situation where real estate prices remain stagnant for some years, while inflation and incomes rise, thereby resulting in improved affordability.
The unprecedented impact of covid-19 is now threatening to change this.
Industry experts foresees a drastic fall in sales, which in the backdrop of the high inventory held by realtors, should also result in a drop in prices.
“Property prices may come down by 10-20% across geographies, while land prices could see an even higher reduction of 30%,” said Pankaj Kapoor, chief executive of real estate consultancy firm Leases Foras, adding, this would be the sharpest correction since the global financial crisis.
Union Minister Nitin Gadkari on Wednesday urged the real estate players to sell unsold housing units, even at no-profit-no-loss, to facilitate their liquidity condition and save interest cost on loans.
To bridge over the economic crisis caused by COVID-19 and create housing demand, the senior minister suggested builders to expand their business in rural areas, engage in road construction and to set up of their own housing finance companies.
He further suggested that there is a need to strengthen non-banking finance companies (NBFCs) through equity infusion from the government and private players. The NBFCs should tap funds from international markets where interest rates are lower.
The minister wished for lower interest rates on home loans with a longer tenure so that the customers’ equated monthly installments (EMIs) remain less.
With real estate players holding huge unsold housing inventories in their hand, Gadkari advised builders, “Don’t be greedy. You will not get a premium price. Whatever price you are getting, sell your properties to boost liquidity and move forward.”
He warned the builders that they are committing mistakes as interest cost to banks, financial institutions and private lenders are increasing.
“The developers should negotiate prices with prospective customers and even sell at “no-profit-no-loss” to avoid huge interest costs”, Gadkari added.
Gadkari further asked realtors to expand their businesses in small towns and villages with affordable housing projects below Rs 10 lakh and not only focus on big cities.
However, the current crisis in real estate also provides some opportunity to buyers and investors alike. From the consumer perspective, for instance, gold is at its record high and the stock market is crashing since the announcement of coronavirus as a global pandemic.
This creates opportunity for consumers to make shift in investment. Real estate can be one sector which can still create an alternate sound investment opportunity for people.
Some realty experts, however, think that consumer sentiments are likely to remain weak for the rest of the year 2020 unless India can contain the coronavirus within the stipulated lockdown period and also there is some amount of sector-specific economic revival package announced by the government.
The writing is clear on the wall. A recovery will be slow and painful.
Every cloud has a silver lining. We are hopeful that with joint efforts from the government and our own people, India will be able to control the pandemic situation and soon be out of the economic crisis.
However ironically, the situation seems to be in the favour of investors as the property prices will further witness a steep decline in the coming times, making real estate sector a good bid to invest.