Coronavirus impact: Will delays and defaults be the new normal in Indian real estate?

With many realty companies on the verge of bankruptcy, the Coronavirus has now increased their troubles. We look at how the COVID-19 pandemic has affected various segments of real estate and what can be done to soften the impact

The impact of the Coronavirus on the global economy has been devastating, so far. Experts believe that the current situation is just a tip of the iceberg and the condition will deteriorate in the coming months. After demonetisation, the real estate sector in India, has faced severe setbacks, one after another. There are many realty companies on the verge of bankruptcy and the COVID-19 pandemic has now increased their troubles.

 

Will there be project delays?

The Real Estate (Regulation and Development) Act (RERA) stipulates timely delivery of real estate projects and on delay, the developers are liable to pay penalties. Owing to the Coronavirus pandemic and total lockdown, developers may fail to deliver their housing projects on time. Several developers have voiced their concern over the difficulties that they may have to face due to RERA requirements. Liquidity concerns were already there in the market and now, many prospective buyers could shy away from buying a home, thereby, worsening the financial situation of developers.

 

Impact on project launches

“Earlier, we had decided to do a physical launch with channel partners and brokers. However, now, due to the COVID-19 situation and as a responsible company, we will be conducting a digital launch, where we will accept requests and enquiries from customers online. We will then be providing time slots to the customers for site visits, where there will be no crowd gathering but every customer will be attended one-on-one as per their respective allotted time,” says Anuj Khetan, director, Vijay Khetan Group.

In a situation where the global economy is slowing down, investors and businesses are adopting a wait-and-watch approach. Digitisation could certainly help in combating the COVID-19 crisis to some extent.

 

Coronavirus impact: Will delays and defaults be the new normal in Indian real estate?

 

Impact on infrastructure construction

Without infrastructure development, the growth of the realty sector is not viable. Due to the pandemic, all construction work has been halted and there is no infrastructure work possible in the current situation. According to India Ratings and Research (Ind-Ra), “The lockdown to contain the COVID-19 outbreak, would obstruct the execution of infrastructure construction. This will impact the revenue growth of construction companies in the near term. Typically, Q4 accounts for 30%-35% of the annual revenue of construction companies, of which a month’s lockdown can erode 8%-10%.”

 

Impact on construction workers

The current COVID-19 outbreak has the potential to bring the Indian real estate industry and its numerous ancillary sectors to a standstill. The slowdown is also bound to have a cascading effect on various industry stakeholders, in particular the daily wage earners who are dependent on the construction sector for their livelihoods.

Nayan Shah, president of CREDAI MCHI, feels that the government should strategically intervene, with essential and timely policy amendments and relaxations, to safeguard the interests of stakeholders. “Some of the recommendations include suspending all financial obligations, including payment for the premium to the MCGM/ special planning authority/ government for one year,” he maintains.

 

Impact on home buyers

According to one report, a large number of home buyers are defaulting on their EMI payments. One of the reasons behind this default by home buyers, is that employers have either sent them on unpaid leave, or retrenched them from their jobs. People tend to buy homes, when they have a stable source of income. Amid severe economic concern, people may not want to put their money in real estate, until there is clarity about revival and support from the government. However, there is no doubt that in this market, a prospective home buyer has a great opportunity to buy a property at a decent price and a home loan at an interest rate that may not rise soon.

 

Steps the government can take

  • About Rs 1 lakh crore is lying in the Building and Other Construction Workers (BOCW) Cess Fund collected from developers. It should be used to provide loss of wages and healthcare benefits to construction workers.
  • As cash flows are affected, because buyers cannot fulfil commitments due to the financial meltdown, additional funds from financial institutions are needed to meet increased costs on the same terms as existing loans and without additional collaterals.
  • Declaring COVID-19 as a ‘force majeure’ under Section 6 of RERA. The force majeure provision provides that registration granted to promoters may be extended. Therefore, project completion time and exemption from penal charges should be extended by a year.
  • In view of there being no cash inflow for real estate, the Special Mention Assets classification adopted by the RBI for delayed payments should be kept in abeyance or amended, so that delays in repayments are not to be reported for the first 90 days.
  • Malls, multiplexes, spas, gyms, clubs, IT Parks, etc., are unable to meet their lease rent obligations and many of them are shutting shop, leading to the lay-off of their workers. To prevent this, benefits under their insurance cover may be allowed by treating COVID 19 as force majeure.

– With inputs from CREDAI.

 

FAQs

What is COVID-19?

COVID-19 or the Novel Coronavirus is a viral disease that affects the respiratory system of humans. It was first identified in December 2019 and has spread globally since then.

What is a pandemic?

A pandemic is a widespread disease that is prevalent in the entire country or world.

 

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