State of the Real Estate Sector in India: Revival Post the Pandemic
The COVID-19 pandemic has hit the real estate sector in India hard. As a sector already ailing from a liquidity crunch, regulatory imbroglios and reduced consumer demand, there is an increased pressure to revive it back into form. In the aftermath of the IL&FS default and resulting crisis borne by non-banking financial companies (NBFCs), the sector has been facing a severe cash crunch. The operating discounts and advance payments from buyers haven’t done enough to restore liquidity. When the pandemic hit and lockdown measures implemented subsequently, construction activities came to a standstill. The fact that scores of labourers have now migrated back to their states begs the question — will they ever return? The resulting labour shortage is sure to delay completion of projects further. Commodity prices started soaring just as the unlocking phase began, thus leading to a rise in the prices of raw materials like cement, sand, steel, etc., thereby adding to the headaches of the realtors.
What Has the Government Done?
As part of the economic stimulus package announced by the Finance Minister, regulatory authorities were advised to apply force majeure conditions and extension to the registration and completion of projects that commenced on or after March 25th 2020. The extension is granted for a minimum of six months. Consequently, the Reserve Bank of India (RBI) also granted a one-year extension for all the dates of commencement of commercial operations (DCCOs). It has also imposed a 6-month moratorium on all working capital and term loans including house loans which is expected to bring relief to the homebuyers. RBI has also pumped liquidity in the order of ₹50,000cr ($6.8bn) into the National Housing Board, NABARD and SIDBI, so as to keep the credit cycling running. Additionally, the continual reduction in repo rates to enable more lending to banks and in turn, realtors is a pertinent measure to keep the industry running.
Why is This Not Enough?
Although the moratorium and extensions are welcome steps, they aren’t enough to fix the wheels of a struggling sector. At least 30 crore families are going to be directly or indirectly affected due to the impending delays and incapacities in the sector on account of the pandemic, which in turn also works in close association with at least 250 ancillary sectors. The need of the hour is comprehensive debt-restructuring and massive liquidity-infusion to ease some strains on a sector that contributes about 6%-7% of the GDP but has an outstanding debt in the order of $15.8bn. To ensure percolation of decreased repo rates, public sector banks must reduce home loan rates to attract the aspiring buyer. It is important to instruct state-RERA adjudicating forums to protect the interests of buyers like escrow deposits, etc. In cases of misuse of the force majeure conditions by the realtors.
What Lies Ahead?
The Government must begin massive skill-development exercise and vocational training for the youth to ensure labour supply in the aftermath of the lockdown so as to resume construction activities. It is also incumbent upon banks, NBFCs and HFCs operating in the sector to issue reformed lending guidelines to attract consumer spending. Although the debt situation looks grim at the national level, the only way to remedy it is to guide credit institutions on a path of responsible micro-financing operation. Regulatory vigil is absolutely essential to that end. The RBI could also consider routing surplus funds into the sector via credit channels so as to help them get back on their feet. Finally, there must be a concerted approach to affect a reduction in income tax rates so that the individual’s disposable income is increased along with his consumption which will in turn increase affordability and growth of sectors like Real Estate.
(Originally published September 3rd 2020 in transfin.in)
