Impact of COVID – 19 on Real Estate Sector

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2008
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The sudden outbreak of COVID-19 has pushed the world into deep financial and economic crises. Challenges faced by the world are increasing day by day spanning across issues of unemployment, rate of poverty, disruption in demand and supply etc. In the current scenario, lockdown has brought the industrial, real-estate, financial and banking sectors to a standstill and the recovery curve will depend on the fiscal stimulus rolled out by the government. Indian debt capital markets are facing significant strain as COVID-19 spreads globally.

Although the real estate sector had been facing financial stress even prior to COVID-19, the outbreak of this pandemic has came out as double whammy for the entire sector. The extent of impact of the disease will be only known after the lock down is over. The problems which can be faced by the real estate sectors can basically be summed up into the following factors:

  • Delay in completion of the Projects: With this sudden move towards nationwide lockdown, many projects which were ongoing were left as it is and because of which many homebuyers had to suffer unexpected delay in possession causing them unnecessary expenses of rent and the EMIs. Even after the end of lockdown, it might take certain time to bring the construction activity to its fuller capacity and optimum effectiveness for completion of the projects.
  • Dispute in Demand and Supply: At the times of such emergencies, people tend to save money to spend it only on the basic necessities. Post crisis, their inclination towards investing in a property will decline as a result of which the demand for house properties will fall. Commercial real estate market will be impacted more as it is a slow mover. If Corona virus keeps impacting the economic supply chains for longer terms than expected, there is a possibility that commercial investment decisions may stray from real estate. According to a recent update, housing sales is likely to witness a YOY drop of 25-35%  in 2020.
  • Labour Issues and price stability: Many daily wage laborers have migrated from their work place to their hometown and this has caused a great problem to the builders. Also it can be predicted by looking at the present scenario that the prices will absolutely remain the same even though the cost may raise, causing the developers to suffer a fall in profit margin as they may face less demand. Although price reduction is necessary to create demand but it may turn out to be threatening to the real estate developers as such the market scenario is extremely challenging and most developers have a corresponding finance cost mounting with delay in project completion.

Steps taken by RBI to boost the real estate sector due to the COVID-19 pandemic:

  • The Reserve Bank of India (RBI) firstly, has extended loans which were given for restructuring of projects for about a period of 12 months, without downgrading the asset classification. This is for projects that were delayed for reasons which were beyond the control of realtors and comes as a major relief to the real estate sector. They say it will benefit residential projects that were delayed on account of regulatory issues.
  • The Central Bank has taken a decision to reduce the reverse repo rate by 25 basis point which is now 3.75% and has provided with additional liquidity for the National Housing Bank (NHB) which will help to accelerate and facilitate bank credit flows towards to the besieged sector in the wake of Covid-19 crisis This reduction in the reverse repo rate will help the banks in lending more amount of money.
  • The Central Bank decided to allot amount of Rs. 10,000 crore to National Housing Bank, which shall be a big relief to the real estate sector struggling under liquidity crisis. It further decided to extend the moratorium period on NBFC loan for the commercial real estate projects. It is observed that due to COVID-19 the ability of the borrowers to repay has reduced therefore, the NPA count shall not include 90-day moratorium.
  • For NBFCs and micro finance institutions, the RBI proposed to make available liquidity worth ₹50,000 crore under the Targeted Long term repo operation (TLTRO) 2.0. This will allow banks to access 3-year funding from RBI to invest in investment grade corporate papers of small and mid-sized NBFCs and MFIs which can be utilized in onward lending to the real estate sector.
  • The Reserve Bank of India has also taken additional measures to support the economy by making an one-year extension for commencement of commercial operations (DCCO) of project loans for real estate projects that are delayed for reasons beyond the control of promoters and are expected to provide relief to real estate sector. Since the repayment schedule will now be extended by a year, the cash flow will be ploughed back into the project, indirectly infusing liquidity into the stuck project.
  • Further the RBI decided that scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segment 2020 from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR). The aforementioned exemption will be available for incremental credit up to July 31st, 2020.
  • The government has introduced an Alternative Investment Fund(AIF) with a total collection of USD 3,570 million to bail out 1600 real estate projects which were stuck due to liquidity crunch. It is expected that these measures will boost growth by increasing the consumption in real estate and associate sector.

Countries around the world have implemented the changes to the real estate policy in order to lessen the burden on tenants and in some cases the landlords. Though the government has taken various measure but they can be proven better if the Government can take the following measures to stabilize the real estate sector in the Indian economy:

  • To solve the problem of high price and taxes paid by the people, the government should reduce the rates of GST charged by it and give some concessions.
  • Government should try to increase the money supply in our economy by maintaining the cash inflows and outflows to increase the purchasing power in the hands of the consumer and creating the demand thereof.
  • The government must take measures to boost the investments which would increase the demand to purchase residential property among the people.
  • The government needs to take appropriate safety measures after the lockdown so that the laborers can resume the ongoing projects which were stuck and take necessary step so that the workers work in a healthier environment.
  • Further the government should work on making RERA more effective so that the projects which have been halted due to lack of funds can be revived back and completed as soon as possible.
  • Lending rate for the reality projects maybe fixed at a lower repo rate in the long run and the NPA classification should be extended beyond 90 days for the projects which are very crucial.

Although the real estate sector is under crises, it is the only one expected to provide largest employment before and after the lockdown in the country and is likely to contribute to around 13 % to country’s GDP by 2025 and become the third largest globally at USD 1 trillion by 2030.

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