Impact of COVID 19 on Real Estate and Construction Industry

The world would not have anticipated such an unprecedented pandemic crisis in the past 100 years at least. Covid-19 has taken a toll of 2 lakh plus lives and aprox 30 lakh people worldwide are affected as on date. The virus is still spreading in a faster pace, and lot many scientists and labs are all on the job to find out the vaccine to fight the virus. During this time when the pandemic is crippling all industries, real estate is one of the very few industries that could go through this crisis and survive amidst short term stress and long term impact on the industry.

Impact of 2008 Recession

The real estate sector was badly hit during 2008 recession. Real estate sales were dropped by 30% while housing loan shot up from 7 % to 12%. Distress sales were common coupled with defaults on loan payments. Home buyers chose to defer their house purchase plans.

Present status of the real estate industry and the Short term impact due to Covid 19

Similar scenario is expected post Covid-19 pandemic. Realty sector, one of the largest employment generator may face huge job losses leading to overall economic slowdown or possible recession. The real estate body NAREDCO (National Association of Real Estate Development Council) has estimated that the real estate is going into the loss of Rs 1 lakh crore. It also seeks $200 billion package from the Govt to kick start the economy.

It is visualised that the overall real estate sales may come down by 25 -30% and the prices of residential units will come down to anything between 15 to 20%. Land price will come down by 30%. The impact of covid-19 will lead to delay of project completion anything up to 6 months or more.

The Real estate sector was burdened with the implementation of 2016 demonetisation followed by implementation of GST bill and RERA act successively within one year. Although it had its teething issues, it was balanced by many positive moves initiated in the last 4 years. To quote few, amendment on GST bill to accommodate the issues raised by various business organizations and associations, amendment on REITs (Real Estate Investment Trust) which are listed entities that invest on income generating real estate properties and distribute 90% of the income generated to the unit holders as dividends, affordable housing incentives, falling interest rates..etc.

With all the Incentives and initiatives offered by the government, it was expected that the real estate market would grow in the days to come and 2020 will bring favourable sale opportunities. However, the unprecedented Covid-19 led lockdown severely hampered this hope and hit the economy overall. This will lead to delay in payments by all stakeholders, face liquidity crunch and unsold units will be on the rise.

The real estate sector will face problems in labour, financials, demand and sale. Customer sentiment and mindset on new purchase at this juncture, will add more to the demand crisis. Rising unemployment with an estimated job loss of aprox. upto 30%, and delayed building approvals will have to be dealt with effectively and proactively to avoid slump in the construction sector. The cost of building materials, mainly cement, steel..etc will increase due to lock down of these manufacturing units. The disrupted supply chain will lead to additional cost on the units thus making the salability tough and the sluggish sale velocity will have an impact on cash flow issues.

Factuals, Financials and long term impact on the industry

The GDP for the first quarter has come down from 5% to -9% in Apr-Jun 2020 and the GDP contraction is expected further more in the subsequent quarters. If such contraction continues for two more consecutive quarters, it will lead India to recession. The Confederation of Indian Industry (CII), in its report titled “A Plan For Economic Recovery” pegged economic expansion rates between a negative 0.9 per cent (contraction) and 1.5 per cent.

The drop in residential sales in top seven cities is from 2.6 lakh units in 2019 to 1.6 to 1.8 lakh units. The sales have come down to 70 to 80%. As per CREDAI MCHI report, the residential booking has dropped down to 78 % from January to March. Liases Foras, a real estate rating and research company, states that property prices may come down by 10 to 20% across the country whereas the land prices may come down by 30%. According to Anarock research, nearly 4.7 lakh units in 7 major cities slated to be completed in May 2020 will get delayed and new launches are likely to register at a decline of 25 to 30%.

The Lockdown has brought the construction activity to a standstill and the site visits by homebuyers have come to a grinding halt. The virtual reality methods adopted by some real estate companies are only a stop gap arrangement to hold their customers. Collections from buyers on ongoing projects and paying EMIs will delay, resulting in overall delay of the project as well. New launches planned for April – May will likely be pushed further till September 2020 to coincide with the festive season.

Any extended lockdown may lead to cash flow management issues. Being declared as national disaster, even the RERA may find it difficult in getting penalties in this force majeure situation. People who have already bought the houses and are waiting for possession may have to be prepared for the delay. If planning to buy, one may have to wait for things to settle down. Alternatively this is the right time to buy residential properties when the inventories are sold on discounted rate or on distress sale.

Remedial measures by the industry

The delays in deliverables can be made up once the work starts in full swing. The Shortage of migrant labour is a short term issue and the construction activity can commence as nearly 60 to 70% of the labour force is available or can be mustered at many of the sites, which includes migrant labour. They are being given food, shelter, sanitary and medical facilities in most of the sites. Providing incentives to migrant labours in various forms will bring back the labour force. Being generous on labour welfare activities and schemes will retain the loyal skilled work force.

The Innovative technology to optimize time and resources like modular construction with change management will be a way to complete the projects in time. In addition, sales strategy be reviewed with a balancing approach of Expenditure vs Revenue keeping in view of the salability aspects of units post Covid 19.

Govt support and initiatives to revive the industry back on track

I strongly feel that the situation will improve by early 2021 even though it hurts the industry in short term. With RBI slashing down the REPO rates, the demand will likely pick up. Demand on residential properties will be better than the commercial properties. Reverse migration from other countries will fetch more demand for residential properties. Lock down and reverse migration will throw light on reversal of joint family system. Thus, more demand for new residential properties and altering existing properties will accrue. Investors will invest more on real estate than on stock exchange/ gold as the Return on Investment (ROI) can be much higher than expected.

Govt has taken various measures to provide relief to real estate sector. In addition, relaxation of RERA compliance for six months will give breathing time for the real estate developers to recover from the crisis. As part of the recovery process, Govt may think of curtailing GST to 50% till Dec 2020. Single window clearance of approvals at all levels for new projects on a fast track basis to avoid delays will augment the real estate market to recover fast.

There will be a paradigm shift of production and service industries from China by the western countries. The supply chain will be affected as some of the construction materials used are manufactured and imported from China. This will give wide opportunities for India, having more skilled man power at lower cost after China. Decision to suspend the relevant sections of Insolvency and Bankruptcy Code (IBC) for one year, is a good move by the Govt at this juncture. This will protect the listed companies from foreign investors who are closely watching the Indian stocks value to fall so that these companies can be acquired by them at lowest possible costs through bankruptcy proceedings.

To conclude, this Covid 19 pandemic is a short time crisis as the Govt is taking all measures to control the disease on war footing while the relief measures are being taken to protect the economy. Once it is controlled, the demand in real estate as well as in all other businesses will rise with greater stability leading to better economic environment. Let’s hope for the best.

About Viruksha

VirukshA offers you the best be it in the construction arena or in the development of senior living communities which offer quality services that surpass excellence. Headed by Lt Colonel M Baskaran, VirukshA redefines senior living standards with the immense expertise and experience inculcated by the head himself.

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Lt Colonel M Baskaran
Lt Colonel M Baskaran

Lt Colonel M Baskaran, who has 22 years of experience serving in Indian Army and 11 years in the Corporate sector, is the Founder and Managing Director of VirukshA.

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