It has sent a chill in the spine for many developers in India post the announcement from the union minister for industry and commerce Piyush Goyal, necessitating the developers to dispose of their finished properties at depressed prices and to grow lean on high-priced unsold stock. Does this decision from the government turn favorable for the home buyers at this juncture? Only time will have to suggest.

 

The Indian real estate market is facing a double-jeopardy at this moment from structural economic factors like the demand slowdown and the scourge of pandemic. This will invariably impact any seminal prospects of value appreciation with respect to the property market. It has turned out to be just wishful thinking to expect any value appreciation for real estate as a whole in the near future.

 

The lackluster growth, one witness in nine major real estate hot-spots in the country, stand testimony for subdued trends in the sector. This reflects lackadaisical consumer sentiment over considering real estate as a reliable investment destination.

 

Follow the statistics, in support of the aforementioned statement:

While there are not many spikes and ebbs with respect to price fluctuation in nine aforementioned markets. Two cities that stand out are Ahmedabad and Hyderabad, for which they have shown some signs of appreciation overtime as opposed to other similarly placed cities. With respect to the Mumbai Metropolitan Region, where prices are already over the roof and substantially undercuts the national average in terms of property prices. Here as well, there seemed no enthusiasm in terms of demand for properties and corresponding price appreciation. In NCR, one stalk observation is that there is a significant correction in terms of the housing market, otherwise, other verticals of the sector seemed to show no significant changes lately.

 

An interesting observation is being made in a recently-released report by property consultancy firm Knight Frank. The top six housing markets in India suffered a price correction to the extent of 2.75% to 7.0% from July to September this year.

 

The poll results released by Reuters also highlight important facts about the housing market in the country. According to the poll, the house prices are expected to plummet by approximately 6% this year, the trend might as well continue for next year. The report also specifically highlights the price decline trajectory for each city, starting from major metropolitan cities like Mumbai, Delhi, Chennai and Bengaluru and their market price decline by 7.5%, 7.0%, 5% and 3.5% respectively. Some also predict that the property prices will go down by 10%, if the scourge of pandemic is to persist for longer.

 

There are some positive takeaways too. Before the onset of the pandemic, there were some structural economic issues like lending and shadow banking crisis. Which could not impact the sector to the extent it was expected. The real estate sector inherently is strong and resilient and can bear any shocks and pressures, while bouncing back with renewed vigour as the crisis recedes. The impact of corona is transitory and the sector in all likelihood will show upward movement as the prevalence of the pandemic subside in the near future.

 

The message from the Union Minister for Industry and Commerce Piyush Goyal that the government would offer necessary support and concessions in terms of reduced circle rates, to bring down the burden on builders and developers, has turned out to be a blessing in disguise kind of a situation. But instead, developers are compelled to reduce prices on their unsold stocks and dispose of them off sooner than later.

 

The statement from union minister Piyush Golay has been a rude sweetener especially for builders and developers. NAREDCO, the expert body concerning the industry has sought USD 200 billion as a relief to tie-over the fallout of the coronavirus crisis. Moreover, the sector was already reeling under the debt burden of USD 120 billion with scheduled commercial banks, Housing Finance Companies and Non Banking Financial Companies.

 

The government is coming down heavily on the developers and builders, who are currently saddled with bad loans and massive unsold inventory. While also offering an element of succor, by providing some concessions to enable promoters to dispose of the unsold properties soon enough and repay debt. Thus lessening the burden on the formal banking system.

 

The economic survey 2019-2020 also highlights the importance of builders and developers taking a haircut to an extent in terms of reducing the prices for unsold inventory and disposing them soon enough. Even Though, the suggested proposal would ensure generating liquidity in the real estate market, there are other issues that might play spoilsport in terms of accepting the proposal.

 

Many industry players are not in a position to accept the proposal made by union minister Piyush Goyal. They think that the slowdown has been prevalent for the last eight years, and reducing prices to incentivise purchase will act counterproductive for the industry in the long run. Moreover, with increased cost with respect to labour and material, there is a limited scope for taking a price cut.

 

Brewing pressure

Developers are sitting on a massive unsold stock of over 7.23 lakh units worth over Rs. 6 lakh crores, mainly present in top nine residential markets. With prospective buyers opting to wait and watch as against taking immediate decisions, making the problem even more daunting and complex. On the other hand, the liquidity crunch, one shall encounter, even if one decides to move further, deciding to buy a property is something that will deepen already a complex problem.

 

The banks have shown renewed resolve to drag many developers to insolvency court in response to non-payment of longstanding dues. This situation turns out to be a vicious circle. Where the persistent slow-down in demand will disincentivize the builders to pay necessary dues and that would end them up in insolvency court. More developers and builders are likely to face the rigmaroles of insolvency proceedings, this will continue for quite longer as we sneak into the future and more likely remain as is, in the backdrop of the contagion.

 

It is estimated that as of March, total outstanding loans of real estate due to commercial banks, NBFCs and HFCs is Rs 4.5 lakh crore. In response to this, the government has earmarked Rs. 25,000 crore stress fund to aid builders complete the pending projects and inturn infuse necessary liquidity into the market, which otherwise is gasping for necessary resources, while the situation is enhanced by the menace afflicted by the pandemic.

 

The current economic contraction, will considerably detracts the government’s focus on real estate. Thus the sector will be defied by the necessary relief package. In a situation like this, developers are hand tied and hardly left with any option but to end up selling the unsold inventory at depressed prices.

 

Industry experts collectively believe that the residential vertical of the sector will further price correction in days to arrive at. With construction activities having reached a screeching halt, making project completion rescheduled for a later date. If the situation persists and shows no sign of subsiding, an alternative investment fund worth Rs. 25,000 crore earmarked by the government will be kept on hold and other investment decisions will also follow suit.

 

There is a re-ordering of priority concerning the general population. The foremost priority has been health and safety, followed by preserving the limited money available. This will invariably result in sharp decline in housing sales for at least a couple of quarters.

 

There was a considerable dent for home sales in the July-September quarter this year. Sales went down 57% compared to the same period last year. Mere 35,137 units were disposed during the said period, reflecting the precarious state of consumer sentiment in the midst of pandemic.

 

Developers heaved a sigh of relief, learning RBI’s stance of lowering repo rate to 4%. Alongside RBI decision to provide moratorium on loan EMI will help bring some balance to the sector against repeated shocks. But, on the flipside, nudging developers to reduce property prices does not augur well with the community, especially at this juncture. Where prospective buyers have turned sceptical about the market going forward.

 

Material cost and associated risk

Project delays are a stalk reality going forward. The supplies that ought to be sourced from China is hindered in the backdrop of pandemic and rising tensions between the two countries. The impact is more pronounced on premium-luxury projects, where fixtures and furnishings sourced from china are mainstay in high-end construction projects. While the reliance on China sourced products are brought down, the search for alternatives have gained prominence. This intern results in an increase in overall project cost. Along with delays in project completion.

 

At this juncture, central government schemes like “Make in India” will gain considerable credence. A collective call to use Indian manufactured or produced commodities will help the domestic economy. But certainly short term pain to tie over the present situation is inevitable.

 

The government is also touted to come up with some crucial measures to induce prospective buyers to make necessary investments. It is also rumored that, government may waive off tax on unsold inventory.

 

It is a catch 22 situation for developers at this time. The longevity and veracity of the prevailing crisis will determine the prices of the unsold inventory. While there will be costs associated with maintaining unsold inventory, there will also be mounting pressure to dispose of the same. It will be a tricky decision for the developers to make, whether to stare at the future with hope or to engage in tactical decision making in response to the current situation.

 

Interest rates and affordability quotient

The dovish stance taken by RBI, has provided necessary impetus for the home buyers to indulge in making investments. The pandemic has also contributed to reduced prices in the sector. But another important piece in the puzzle is the clarity over the prospects of the job market.

 

It is utterly necessary for the banks to transmit the repo rate cut by RBI to home buyers. Which in turn brings in necessary liquidity to the sector. It is speculated that the government is planning to further the tax concessions given under sec 80EEA beyond march 2021. This will also infuse positive sentiment for new home buyers. But the anxiety and uncertainty regarding Jobs and salaries are likely to persist even after the situation retrieves to normal.

 

The government has done it’s part along with RBI. it is upto the developers to do their bit and reduce price to an extent, that would entice the fence-sitters to get lured. Given the weak job market, support from all possible quarters will help infuse positive sentiment to the sector.

 

As per the survey conducted by NAREDCO, 47% tenants would prefer investing in a property that is appropriately priced. Thus bringing down prices will substantially impact the buying psyche of the prospects. Thus it would offer a worthy value proposition for the prospective buyers to invest on a property as opposed to renting.

 

Revision in stamp duty

Some states have announced a cut in stamp duty to aid in bringing down the price and also boost the sentiment in the market. For example, Maharashtra, has temporarily reduced the stamp duty prices to 2% of the property value for six months. Karnataka has also brought down the stamp duty to 3% of the property value worth on/below 30 lakhs. Madhya Pradesh also announced reducing the cess on stamp duty, thus effectively bringing down the rate to 2% of property value.