The three-week lockdown to contain the covid-19 pandemic has deeply impacted India’s real estate sector, which was already reeling from a liquidity crunch and weak residential sales.
The impact on discretionary spending may disrupt the retail mall business for a long time, while a sharp drop in home sales will heighten liquidity and cash flow pressures for developers. Affordable housing, which has held up in the five-year-long slowdown, may also get hit by the ongoing crisis.
However, the commercial office business, which has been an outlier of sorts, may face limited impact though this may be determined by how the information technology (IT) sector, one of the largest occupiers of office space, performs in the near future.
“Residential sales are down by 70-80% because of the lockdown and distancing, and there is a postponing of decisions by buyers that may take some time to return to normal. However, housing is a necessity and we hope that those who need homes will buy at some point. The situation is critical and the impact on the sector would depend on how the government handles the situation and the incentives it gives,” said Niranjan Hiranandani, co-founder and managing director, Hiranandani Group.
Shopping malls would see a 10-12% year-on-year erosion of rental income, given the temporary closure of malls and the risk of reduced footfall and discretionary consumption spends in 2020-21, a 27 March note by India Ratings and Research said. Cash flow gaps could widen in the residential sector, with limited sales in the coming months and debt servicing could be a challenge, especially for non-Grade 1 developers, it said.
The situation has added to the liquidity and cash flow crunch in the sector, said Gautam Chatterjee, chairman, Maharashtra Real Estate Regulatory Authority (RERA).
“There is a lot of uncertainty now on how long this crisis will last and what happens after that. How long will construction remain stalled? When will migrant labourers return because it is a labour-intensive sector? Lack of money had stopped construction work in many cases and with this crisis now, it’s important that the construction cycle resumes soon,” Chatterjee said.
On Thursday, Maha-Rera extended the completion deadline of registered projects by three months. However, Hiranandani said the impact could last longer and a one-year moratorium would be better.
Given the impending economic slowdown and job losses, if housing finance companies and banks were to tighten their home loan disbursements criteria, sales or collections could see further pressure especially in the affordable segment, the India Ratings report said.
Bengaluru-based Brigade Group’s residential sales were good until the lockdown, said its chief financial officer, Atul Goyal. However, once the lockdown kicked in, customer bookings stalled, though Brigade is now taking bookings online. “Payments are still coming but the run rate is down. A lot will also depend on job and salary cuts and how the IT sector performs. It helps that Brigade has a diversified real estate portfolio because those only into residential or retail projects may face challenges. Well-capitalised developers will survive, but many others may go for loan deferments,” Goyal said. Brigade has already made interest repayments for March, he said.
Embassy Group chairman Jitu Virwani said fund-raising may be a problem if this continues, but so far, there has been no significant impact on the office leasing business.
The liquidity crisis has been a concern for over a year, with non-banking lenders staying away. The epidemic couldn’t have come at a worse time, when the residential sector was expected to slowly recover over the coming months.