The real estate industry is passing through its toughest phase. It is now that the import of institutional investors is felt for the sustenance of the industry, say market observers. “We believe, the COVID-19 crisis notwithstanding, there exists good potential for funds looking for productive deals. Going forward, most of the capital will be infused into emerging assets classes such as warehousing and logistics and affordable housing, and their growth will gradually bring back traction to the market,” says Shrinivas Rao, a founding member and presently CEO of Vestian Global Workplace Services, who has 25 years of experience in the global real estate industry.
According to Mr. Shrinivas Rao, “COVID-19 further came as a dampener to the market in Karnataka which was already lagging significantly on the affordable housing front and was expecting to pick up pace, both on the developer and the buyer front.”
Speaking on a range of issues that have bogged the market in Bengaluru including liquidity crunch in the sector to GST rates that had slackened the sector’s growth in the residential segment in the past few years, Mr. Shrinivas is hopeful that the residential market will pick up pace gradually in the next six months. “The upcoming festive season is expected to witness a fair quantum of traction in the market as well,” he says in an interview to The Hindu Property Plus .
Excerpts…
With extended timelines of construction / projects, what is the impact you foresee on sales of residential units as there is a long wait for approvals too in construction?
Construction activities across the country have been constrained severely on account of the lockdowns, labour unavailability and social distancing norms in the wake of the COVID-19 pandemic. This may have an impact on future available supply, if the COVID-19 crisis continues unabated and construction activity continues to be restricted. Residential projects that had been planned for delivery during the period 2020-2022 may be delayed. As such, buyer demand for ready properties may pick up faster than in under-construction projects with extended completion timelines.
How long do you think it will take for the industry to wake up?
With government initiatives such as the SWAMIH stressed asset fund focusing on last mile funding of developers with stalled projects, the RBI reducing key interest rates and bringing in targeted long-term repo operations to ease liquidity in the system, moratorium on loans, and RERA timeline extensions, the residential market is expected to pick up pace gradually in the next six months. The upcoming festive season is expected to witness a fair quantum of traction in the market as well, particularly in the affordable and mid-income housing, with developers offering a variety of offers to boost sales.
What about the residential projects that are stalled - the higher pricing expected (as funds for developers would have receded too) - and the repercussions of wait on people who have booked?
According to government estimates, there are 4.58 lakh stalled housing units in 1,509 residential projects across the country. While the Union Minister of Commerce and Industry Piyush Goyal has said that developers needed to sell residential projects at reduced prices to lower high-priced unsold stock, there is, however, limited scope to cut prices. With most home buyers fence-sitting and sources of liquidity fast drying up, the residential sector was already in a tough phase. The situation has been exacerbated by the COVID-19 crisis as labour shortage and supply of construction materials imported from China is impeded on account of the pandemic. The rising tension between the two countries would lead to a further constricted situation. So, with developers seeking alternative sources to meet their building requirements, and with increasing material cost, the chances of prices for under-construction projects coming down substantially is rather slim.
On the other hand, prices of ready properties held by stressed developers have reduced, particularly in markets with high levels of unsold inventory. While Bengaluru has not witnessed much of a price decline, housing prices in cities such as Mumbai have corrected by at least 10-15%.
Meanwhile, with lockdown stalling construction, people who had already booked homes are bracing themselves for further delay in the possession of their properties.
When the funding rate increases, so will the cost factor for the buyer in any residential dealing, isn’t it? Add to this the cost of construction material, for example. What percentage of hike would make sense for a buyer now? Also, there are rumours of builders offering discounts to see projects getting picked up?
With increase in funding rate and construction material, the cost of construction too increases for the developer. However, it is totally up to the developer to decide upon the percentage of price hike in view of market conditions and saleability. Regarding the rumours, several builders are actually providing discounts and various other offers in order to try selling their inventory sooner rather than later, to avoid higher interest costs.
According to a cement sector report shared with the media, cement prices have declined owing to non-demand. Demand in the south regions in Kerala, some parts of Karnataka, Andhra and Telangana is affected by heavy monsoon, and pan-India cement production has declined by 13.5 per cent as of July 2020. What bearing will such things have on residential prices?
Softening of cement prices would decrease construction costs but would be offset by increase in additional costs such as labour as well as other construction materials, leading to an overall increase in construction cost.
Would Bengaluru’s unsold inventory of residential see a huge spike if the majority of builders decide on not cutting down prices? What is the position of inventory pile-up in the city?
It has been observed that buyers in Bengaluru are actively looking for houses even during such challenging times as the COVID pandemic, primarily through web portals. According to industry reports, housing enquiries in Bengaluru have almost reached 70% of the pre-COVID-19 level. Thus, the city residential market is expected to revive soon, without adding substantially to the unsold inventory. A key factor that would work for the city’s housing segment is that prices in most markets are relatively affordable to their target categories. The price appreciation in the past has been prudent enough not to create drastic market upheaval. Presently, buyers have been adopting a cautious stance primarily on account of job uncertainty brought forth by the COVID-19 outbreak, amongst others.
And regarding the pile-up, presently, there are around 65,000 unsold housing units in the city. This translates to about 8 quarters of inventory overhang. Given the decline of new project launches and developers focussing on completion of under-construction projects, we project a steady decline in the unsold housing unit numbers to a healthier number.
What is the scene in home loan disbursals? Will the slowdown seen have effects on the economy?
Home loan disbursements came to a standstill amid the COVID-19-induced lockdown as in a housing loan, unless the property is seen and a physical verification done, along with submission of legal documents and signature of customers, the loan cannot be disbursed.
Further, the moratorium allowed to customers regarding their loans prevented banks and HFCs from collecting repayments. Consequently, the blow from the pandemic was largely on the individual loan book growth. As per HDFC Ltd, retail loans grew by 11% in the June quarter, down from 14% in the previous quarter. The share of individual loans in incremental disbursals dropped sharply to 17% from the average 80-90% in the previous quarters. With the lockdown being lifted gradually, home loan disbursements are expected to improve, though the road to normalcy is likely to be a long one. It is anticipated that disbursements may come back to near normalcy by early next year. Meanwhile, there have been applications for extension of the moratorium period. HDFC and many other non-banks would be hit significantly if it is extended or the loans are restructured as per RBI guidelines, as loan growth already is hard to come by, especially from the crisis-hit real estate sector.
