Surge in Covid-19 cases may derail real estate from recovery path

Amid a dramatic spike in the number of new coronavirus cases in India— it reported a record 115,736 new COVID-19 cases on April 7, 201, showing a 13-fold increase in two months—demand for residential real estate in India might be thrown off track, says head of industry body CREDAI.

According to health ministry data, India has recorded 12.8 million cases, the most after the United States and Brazil. The surge in cases has resulted in a large part of India, especially in Delhi, Maharashtra, Rajasthan, Odisha and Gujarat, now being under restrictions which include part-lockdown, weekend lockdown, night curfews, etc.

“We are worried about the second wave of the Covid-19 pandemic. If logistics and supply chain support are available and migrant labour is on sites, I don’t think there will be a problem. In case of a complete lockdown or loss, the (buyer) sentiment may get impacted… The Covid-19 may turn out to be a short-term dampener,” said CREDAI national president Harsh Vardhan Patodia at a virtual press conference.

The demand for housing in India might also impact amid a change in stance in the banking system.

Even though India’s apex bank on April, 7, 2021, decided to maintain a status quo on policy rates on April 7, 2021, public lender SBI has increased its home loan interest rates by 25 basis points starting April, in an indication that banks’ might move away from the existing historically record low interest rate regime.

Developers are of the view that the Reserve Bank of India could have done better by effectuating some reduction in its recently announced monetary policy review.

“While it is understandable that the repo rate (at which RBI lends money to banks in India) remains unchanged, the need for special steps cannot be overlooked. Although the government has taken some steps to support the sector in recent months, such as implementing stress funds and announcing stimulus packages, further reforms are needed to help the sector expand. It would be difficult to sustain the demand in real estate without adequate government support to the developers,” said CREDAI national (north) vice-president Manoj Gaur.

According to Abhishek Bansal, Executive Director, Pacific Group, the continuous influx of cases is thwarting the stability that commercial real estate needs for planning expansion, mapping already allocated funds, attracting foreign investors, and allocating some money to construction and permits.

“We expected apex financial institutions to closely monitor the real estate market, and, if not repo rate cuts, some other form of relief to boost sentiment among associated stakeholders,” he opines.

Meanwhile, the impact of the monumental surge in the number of Coronavirus cases has become visible on India’s office markets, as well. Reports by two global property brokerage firms, show that net leasing activity during the January-March period of 2021 showed a decline, because of the prevailing  situation. While a report by Cushman and Wakefield showed that the net leasing of office spaces across seven major cities reported a 48% annual decline in this period, another research report by JLL India said a 36% decline was witnessed in net leasing activity during the quarter in these markets.

Housing affordability seen increasing

As India continues with its Coronavirus vaccination drive, the positive impact of the inoculation programme will also be seen in the country’s real estate segment.

If the improving housing affordability is any cue, India’s residential real estate sector is likely to witness better sales and supply in the January-March period of 2021, the lingering impact of the Coronavirus pandemic on the sector notwithstanding.

Amid the RBI continuing to keep the repo rate unchanged at 4%, home buyers can currently get home loans for as low as 6.65% annual  interest. This is in contrast with the average home loan interest rate of 8% seen in January 2020. Price growth in the housing segment has also been under pressure in the past one year, due to the impact on demand.

In a report titled ‘India Real Estate Outlook – A new growth cycle’, property brokerage firm JLL India has also indicated that new housing supply in 2021 would continue to be in the affordable and mid-segment, with developers attempting to reap the benefits of strong pent-up demand.

With most rating agencies making an upward revision in India’s growth forecast, the recovery in the country’s housing sector may also be better and earlier than expected.

On March 24, 2021, Fitch Ratings revised India’s growth estimate for fiscal 2021-22 to to 12.8%, from its previous estimate of 11%, saying that ‘a stronger carryover effect, a looser fiscal stance and better virus containment’ have led to the upgrade in growth projection. Many other rating agencies and global think-tanks, including Moody’s Analytics and the Organisation for Economic Co-operation and Development (OECD), have also made upwards revisions in India’s growth forecasts, amid the domestic inoculation programme against the virus picking up pace.

With the economy picking up and employment witnessing stability, the existing momentum in housing sales could sustain in the year 2021, the brokerage firm opined.

 Vaccine rollout to restore normalcy in India’s Corona-hit housing segment

Pune-based Serum Institute of India Ltd, the world’s largest vaccine manufacturer by volume, which has been enlisted by the government in India to manufacture a billion doses of AstraZeneca’s Coronavirus vaccine, started distribution across locations on January 12, 2021.

As India kicks off the race to vaccinate its over 1.3 billion people in mid-January, the positive impact of what could be termed as one of the world’s biggest inoculation programmes, will also be seen in the country’s residential real estate segment, the sector that employs the largest number of unskilled workers.

With a massive vaccination drive underway, risks to the recovery may abate and economic activity is expected to gain momentum in the second half of 2021, India’s banking regulator, RBI said, while announcing its monetary policy statement on February 4, 2021. “Financial markets remain buoyant, supported by easy monetary conditions, abundant liquidity and optimism from the vaccine rollout. Growth is recovering and the outlook has improved significantly, with the rollout of the vaccine programme in the country,” RBI governor Shaktikanta Das said.

Amid expectations of the launch of the inoculation programme, green shoots of revival have, in fact, already become visible, with this same being reflected in the quarterly housing sales and new supply numbers.

After touching a record low during the previous two quarters amid a dramatic rise in the number of infections – as on January 12, 2020, India has reported nearly 10.5 million COVID-positive cases and 1,51,000 deaths due to the virus infection – home sales in India’s eight prime residential markets touched 58,914 units in the October-December period of 2020, showing a 68% quarterly increase, according to a recent report by property brokerage firm by PropTiger.com. New supply numbers also showed a significant uptick, registering a 173% quarter-on-quarter (Q0Q) growth.

“All factors considered, the sector has shown remarkable tenacity in 2020, against unprecedented odds that have caused the economy to contract and impacted consumer spending. The fact that housing sales in India’s key markets have started to bounce back, in spite of the general gloom caused by the pandemic, shows the immense potential of the real estate sector, which employs the highest number of unskilled workers in the country,” said Dhruv Agarwala, group CEO, Housing.com, Makaan.com and PropTiger.com. The sector’s performance seems particularly impressive, says Agarwala, considering that the pandemic has impacted the income-generating capacity of a large number of people.

While this could be seen as the start of a full-fledged and slow yet steady recovery process, a lot will depend on how efficiently Asia’s third-largest economy, with its limited heath and transport infrastructure, manages the daunting task of making available the vaccine to its large number of people amid supply-side concerns. The same factor would have an impact on the overall economic recovery scenario, which, in turn, would be instrumental in shaping the future for India’s residential realty segment. So, India’s economy is far from being out of the woods.

Even in the best-case scenario, India’s gross domestic product growth, according to government projections, is estimated to contract by a record 7.7% during 2020-21 with the pandemic severely affecting the manufacturing and services segments.

In contrast, global agencies and think-tanks have forecast a much steeper contraction. In fact, the International Monetary Fund (IMF) in its World Economic Outlook released on January 26, 2021, predicted India’s economy to contract at 8% in the current financial year, higher than the 7.7% decline projected by the government’s advance estimates. The IMF has, however, pegged expects the economy to grow at 11.5% rate in the next financial year before slowing to 6.8% in 2022-23. This means India would continue to be the fastest-growing large economy in the world in the two years. The international agency also stated that it was surprised by India’s second quarter growth numbers. As against the predictions of a double-digit contraction, India’s GDP growth contracted by 7.5% in the quarter.

According to the World Bank Global Economic Prospects estimates, India’s economy will contract by 9.6% in FY 2021, amid a drastic decline in household spending and private investment. Growth is expected to recover to 5.4% in 2021. The International Monetary Fund has also projected India’s economy to contract by 10.3% in FY 2021, forecasting an expansion of 8.8% next year.

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Indian housing market’s initial reaction to COVID-19

Much has changed with the Coronavirus hit the world in December 2019. Amid countries applying extreme measures to contain the pandemic, businesses came to a grinding halt across the world, forcing monetary agencies to slash growth forecasts for the global economy, India included.

In its World Economic Outlook October 2020 report titled, ‘A Long and Difficult Ascent’, the International Monetary Fund (IMF) has said that the Indian economy would grow at a -10.3% rate in 2020 – a downgrade of -5.8 percentage points from the agency’s June estimate.

After the gross domestic product (GDP) numbers for the first quarter of FY21 showed a decline of 23.9% over the same quarter last fiscal earlier, global rating agencies S&P, Moody’s and Fitch also projected Indian economy to contract by 11.5% and 10.5%, respectively, in the current fiscal.

S&P Global Ratings, on September 14, 2020, cut its FY21 growth forecast for India to -9% against -5% estimated earlier, as the number of infections in the country touch record levels. “One factor holding back private economic activity, is the continued escalation of the COVID-19,” S&P Global Ratings Asia-Pacific economist, Vishrut Rana said.

While the adverse effects of the pandemic are already being felt across the world, varying opinions are emerging on COVID-19’s impact on the real estate sector, a health emergency that force-launched the biggest ever work-from-home experiment globally, putting a question mark on the relevance of workspaces in a post-Coronavirus world.

In India, where the economic contraction indicates towards a delayed start of the long-arduous road to recovery, a prolonged lockdown — which started from from March 25, 2020, and was eventually extended till June 7, 2020, amid a dramatic rise in the number of infections — worsened the situation in Asia’s third-largest economy.

As is evident, research agencies are predicting a near-term halt in growth of real estate in India. PropTiger.com data show housing sales in India’s eight major cities declined by 66% in the period between July-September 2020.

“While the Chinese economy has been reeling under the impact of the Coronavirus contagion since December 2019, the situation started to get worrisome in India only in March 2020. The lockdown, which virtually brought to a standstill most economic activity in the country, has hurt all sectors, including real estate. The adverse impact of the Coronavirus is visible on housing sales in the last quarter of the last fiscal because March is usually one of the biggest month for sales,” says Dhruv Agarwala, group CEO, Housing.com, Makaan.com and PropTiger.com.

“With several macro-economic indicators showing a positive trend in September, we may well be on the road to a more sustained recovery and the upcoming festival season will be critical, in determining the growth trajectory in the sector over the next twelve months,” he adds.

Although deal volumes in office space in India increased 27% year-on-year in 2019, to an all-time high of over 60 million sq ft, the growth momentum in India’s commercial segment is also likely to get derailed due to the virus attack.

Any positive predictions about its growth made before the sudden outbreak of the global calamity stand retracted, as the government gets busy devising plans to stop businesses in general and the economy in particular from sinking deeper into a slump, amid impending fears of the rupee declining to a low of Rs 78 against the US dollar.

While the real extent of the damage is hard to grasp in a scenario where every day is making a great difference, one thing is for certain – India’s real estate sector will suffer short-term shocks on account of the contagion.