In everyone’s mind it is the same question. What will happen to the Real estate market after the lock down is over. Yes, it’s a very serious issue which has a great impact on the overall sector including the construction sector.
Real Estate Emergence: Post Lock down - Dr K.S.Chandrashekar
In everyone’s mind it is the same question. What will happen to the Real estate market after the lock down is over. Yes, it’s a very serious issue which has a great impact on the overall sector including the construction sector. In order to understand the magnitude, statistics say that in 2018-19 the construction sector had a share of 7.54% of the total economy and the real estate sector was 15.54%.(Source : Niti Aayog Report of Feb 2019). So if we consider both together, the magnitude becomes huge and also a serious matter to delve upon.
The entire real estate and construction sector is closed and not working for almost45 days now. The site construction work has stopped, labours gone to their respective home states, zero sales, banks unable to disburse home loans and therefore all cash revenue stopped. The Real estate sector was already indol drums since last three years and the road for recovery had just begun and this pandemic again has hit this sector badly.
It may be recalled that since mid 2016 onwards, the sector was reeling undersevere stress due to certain govt. interventions and changes. This was worse due to the fact that this is the only sector, which I always considered to be the most unorganised. So obviously the government had to intervene and bring it in to main stream by introducing various stringent measures for getting it organised. The govt. intervention through 1) demonetisation; 2) introduction of GST; & 3) introduction of RERA had made things tougher and had hit this sector below the belt. Not even the big developers whose cash flow was good could survive the impact. Personally, I believed that these changes are good for the sector wherein it was bringing transparency and accountability. However, the sector slowly adopting the changes and was trying its best to bounce back and this pandemic struck out from the blue.
As a matter of fact, this sector had in recent times stated shaping well that JLL in one of its study conducted on the Indian real estate sector had projected to reach a market size of USD 180 billion by 2020 and it also projected that the housing sector contribution to GDP will be more than 11% by 2020. Now with this pandemic, the experts wold surely be re-calculating the mathematics to derive the present market position.
Issues which developers will face post lock down:
- Mobilising the labor force: This is a herculean task at present due to the fact that many of the labours would have migrated to their home states and many would be waiting to visit their home state after the lock down is removed. So availability of labor shall be a vey big problem. So it will not be easy to mobilise the labour force, particularly by the small and mid size developers.
- Procurement of building materials: Another major task. Although the government has relaxed the movement of inter and intra state commercial trucks carrying building materials, but at the same time, this sudden surge in the requirement may put the delivery time frame to a toss. Delay shall occur and prices may also increase;
- On set of Monsoon: The monsoon will approach by beginning of June and the construction activities will be considerably slow down. By the time the labor force is mobilised and material procurement is put in place, the monsoon will descend and the works has to be stopped again. So most of the builders shall start the works only after September 2020. So there is a gap of almost six months for the work to restart.
- Decrease in Sales: Due to the pandemic and overall economic slow down, the customers shall prefer only constructed flats rather than under construction flats. So all the projects which are under construction will face major problems on sales with a rippling effect on its cash flow thereby making the scenario worse. In variably, the market price of apartments particularly for under construction sites may have to reduce to remain in market;
What needs to be done by developers and government:
- Government intervention: The secretary Ministry of Housing and Urban Affairs has already indicated that the government is in the process of formulating guidelines for the real estate industry. We need to wait and watch the announcements.
- Relaxation in Bank Lending to Builders: The banking sector should relax their lending norms and give short and soft loans to the projects where the civil works is completed and only brick work and finishing is required to be undertaken. If soft loans are provided to such cases, the builder can complete the said construction of the building and give possession to the customers so that the revenue is recovered and the bank loan can be repaid without any problem. This shall help the builders to complete the building and sell them easily.
- Extension of project completion time line in RERA: The government should be proactive in allowing automatic extension of minimum one year for all projects which are registered under RERA so that sufficient time is available for the builders to generate resources to complete the project.