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Will India’s real estate prices finally face a reality check now?
Live Mint  |  April 6, 2020

Vatsala Kamat Chennai

A reality check on real estate prices in India often comes through a process known as ‘time correction’, rather than a in absolute prices. Time correction refers to a situation where real estate prices remain stagnant for some years, while inflation and incomes rise, thereby resulting in improved affordability.


The unprecedented impact of covid-19 is now threatening to change this. Industry experts suggest a drastic fall in sales, which in the back of the high inventory held by realtors, should also result in a in prices.


“The present scenario of a national lockdown is unprecedented. The global financial crisis marked a financial meltdown, but the covid-19 lockdown has a human angle to it. With uncertainty looming over jobs, salary cuts and future cash flows, big-ticket discretionary purchases would be last thing on the buyer’s mind," said Murtuza Arsiwalla, associate director- equity research, Kotak Institutional Equities.


In fact, Anarock Property Consultants Pvt. Ltd expects an annual decline of 25-35% in home sales (top seven cities) in 2020. “Property prices may come down by 10-20% across geographies, while land prices could see an even higher reduction of 30%," said Pankaj Kapoor, chief executive of real estate consultancy firm Liases Foras, adding this would be the sharpest correction since the global financial crisis.


The impact is expected to be so severe that credit rating agencies are starting to worry about defaults in the sector.


“If the lockdown prolongs, it would adversely hit cash flows of developers. This could then make real estate one of the worst-affected sectors from a credit rating perspective," said Sachin Gupta, senior director, Crisil Ratings. The rating agency has placed real estate among the least resilient sectors in the current crisis.


The writing is clear on the wall. A recovery will be slow and painful.


Note that this comes on the back of improved sales in recent months, which had resulted in increased launches by realtors, and hence higher inventory.


A note by JLL Ltd said developers have locked in capital or unsold inventory worth Rs 3.7 trillion as on 31 March. Inspired by some green shoots of demand recovery last year, new launches outpaced sales in the quarter, leading to an increase in unsold inventory.


Developers may be able to pull through for some time with collections from existing sales. But, the problem is more complicated this time compared to some previous turbulent phases such as demonetization and implementation of the goods and services tax.


In the residential market, demand from investors had already ebbed due to the above-mentioned time correction in recent years, which meant that returns have been low for investors.


End-user demand, which was largely responsible for driving sales, will now take a hit. As Arsiwalla said, big-ticket discretionary purchases would be last thing on the buyer’s mind.


Banks too, are likely to be more cautious with loan approvals, given the worrying prospects of job losses and pay cuts.


The moot question then is: when will the buyer return to the market? Needless to say, that would depend on the magnitude and duration of the current crisis and how long the lockdown continues.


To be sure, realtors will hope that policy support during these tough times will not only help them stay afloat, but also avoid a big in prices. During the financial crisis, liquidity was made available to the real estate sector, which had helped developers hold on to inventory and not resort to distress sales.


Large developers remain optimistic. “We have not seen any booking cancellations since the covid-19 outbreak and end-user demand will only be deferred, marginally," said Swaroop Anish, executive director-business development, Prestige Group. He added that home loan rates are likely to remain at low levels too, which should aid demand. And who knows, a price correction may evince some interest from the investor community again.


But again, much depends on how long the covid-19 impact lingers.


Already, there are concerns about the impact on demand for commercial space, with the work-from-home alternative getting tried and tested during lockdowns.


“We see any covid-19 induced economic slowdown in US and Europe over the medium term as a bigger risk to Indian office demand in CY21-22E. Our channel checks suggest that pre-leased upcoming supply and near-term deals in the leasing pipeline may get deferred by one or two quarters," said a report by ICICI Securities Ltd.


The pain extends into the retail segment too. The mandated closure of malls and the in business and leisure travel has led to hotel occupancies declining significantly.


Stock market investors have been quick to sense the greater trouble for the sector. The Nifty realty index has fallen 48% since February on news of the coronavirus outbreak, sharper than the Nifty 500 index that fell about 33% during the same period.


The only silver lining in these dark clouds is that developers in the organized segment have emerged with healthier balance sheets in recent years.


“Large-sized listed companies are better placed with most players having debt-equity of around 1x. This compares well vis-à-vis the global financial crisis times. These players with low leverage will be better placed to wait out the post-covid period till the demand picks up," said Gupta.