After Union Minister of Commerce and Industry Piyush Goyal on June 3, 2020, the developer community in India was in a state of panic after saying that builders needed to sell housing projects at discounted rates and let go of the high-priced unsold inventory. The minister said the government could perhaps provide some concession in circle rates in a terse message to the group to lower their burden, but they must be more open and honest in lowering prices.
Goyal said during a video conference meeting organized by the National Real Estate Development Council (NAREDCO), “If any of you think that government will be able to finance in such a way that you can hold longer and wait for the market to improve because the market is not improving in a hurry, your best bet is to sell.”
The announcement came to NAREDCO, which pursued USD 200 billion in aid, as a real surprise to cope with the aftermath of the coronavirus crisis. The sector was still dealing with a USD 120 billion bad debt situation with banks before things went bad, because of the pandemic. The next day, Uday Kotak, the newly elected CII president, said he agreed with Goyal.
The 2019-20 Economic Survey also pointed out that, by taking a reduction as a tool to prevent their inventory burden, builders could cause prices to fall. The HDFC chairman released similar views when he said developers should sell their inventory at whatever rates they get to create cashflow. A lot of concerns are, however, in hand, which finds it challenging to consider such suggestions.
Developers are under mounting stress
As of 30 September 2020, developers in the top nine residential markets were sitting on unsold stock of over 7.23 lakh units worth over Rs 6 lakh crore. With buyers being fence-sitters, a significant number of builders are almost entirely out of the question with any possibility of profit-making; liquidity sources are also increasingly drying up with the current crisis of non-banking finance companies (NBFCs).
Banks have taken many major developers in the nation to the insolvency court regarding the non-payment of large-scale dues. If the issue of demand slowdown continues for a longer period of time, more builders may have to face the same fate, a very likely scenario in the sense of contagion. Remember here that as of March 2020, the total outstanding loans of real estate developers from commercial banks, NBFCs, and HFCs are estimated at around Rs 4.5 lakh crore.
Although the government has already agreed to create a Rs 25,000-crore stress fund to help builders accomplish their pending projects and incorporate more liquidity into the economy through a stimulus package based on COVID-19, an overall economic downturn will restrict its ability to concentrate on real estate and give significant relief. In a complex scenario such as this, earning by way of home sales remains the only alternative for a developer.
Whereas the recent RBI move to reduce the repo rate to 4% and offer a moratorium on loan EMIs will provide developers with some relief against the ongoing impact, there seems to be no possibility of lowering property prices, especially as buyers remain elusive from the market. Project launches could drop dramatically in the meantime. .In reality, only 19,865 new units were introduced in the September 2020 quarter across the eight markets This is a 66 percent year-on-year drop.
Record low interest rates to make home-buying affordable
The RBI has lowered the repo rate to 4%, making it more attractive for home buyers to borrow. As a result, rate of interest on home loans are below 7% percent. Once insight on the influence of COVID-19 on the job market is identified, this would act as a booster for buyers to invest in property at a price advantage.
Although the government has indeed extended the protections provided under Section 80EEA until March 2021, in order to give a boost to first-time home buyers, it might also consider extending it further. Experts are of the opinion that, even after the worst is over and normal life returns, anxiety about impending job losses among consumers is likely to persist. Until that period , the government will have to continue extending support.
Some correction from the developers’ side, however, would still be expected, since cheap home loans alone would not be the trick in a weak job market. In fact, property investments could increase if developers were to offer a certain reduction.
Stamp duty correction
Some states have also declared declines in stamp duty, the tax that buyers have to submit to the state government as a percentage of the purchase value, in the wake of the Coronavirus pandemic, in order to further raise buyer sentiment and decrease the overall buying cost for buyers.
Increased procurement cost of materials
Project delays are on the cards as the supply of construction materials imported from China by India is disrupted in the midst of the pandemic and in the face of increasing tensions between the two countries. The effect of the situation on premium-luxury housing projects that rely heavily on suppliers of fixtures and accessories from China, the country where the source of the infection has been traced, will be more prominent. In addition to slowing housing developments, the time lag would eventually increase the total cost of project construction, as builders here would have to rely on alternate sources to meet their building requirements.
In the medium to long term, the center’s ‘Make in India’ programme could get a boost from this difficult situation, but short-term pain for developers is unavoidable. Dropping prices is hardly the answer in a scenario like this. The government may, however, launch initiatives that could make it more profitable for purchasers to invest in properties. Real estate, the second largest producer of jobs in the country, is also expected to be supported by waiving taxes on unsold inventories.
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