COVID-19Impact and key measures to mitigate risk

The real estate sector showed resilience in 2019. Residential market across the top seven cities in India recorded a growth of 6% y-o-y in the number of units sold and office absorption touched historical highs. As uncertainty grips the world, the year 2020 has started on a turbulent note. The Covid-19 outbreak has led to a global health crisis; putting pressure on economies across the globe.

The current global environment is likely to lead to a decline in the inflow of foreign institutional investments into India. Moreover, a slump in oil prices to multi-year lows may affect sovereign wealth funds, which are likely to reduce investments into India. The state of the domestic economy presents another big challenge – GDP growth dipped to a six-year low of 4.7% in the last quarter of 2019, the NBFC liquidity crunch continues and the inherent problems in India’s banking and financial sector. In the aftermath of this ensuing slowdown triggered by a weak business climate and ongoing liquidity concerns, the Indian real estate market, which contributes nearly 8% to the GDP, is likely to be adversely impacted.

It is currently too early to provide a detailed, quantitative assessment of the COVID-19 impact on economic activity, industries and the real estate market. The effects of the outbreak will inevitably vary from market-to-market, and the true impact and recovery will manifest in forthcoming quarters.

Background

Residential ‒ Walk- ins reduced by 30%-50% in the initial weeks of March 2020 and has come to a standstill amidst

the lockdown

‒ Buying discussions at advanced stages and negotiations are also being deferred / put on hold

‒ Most of the prospective buyers are going into the wait and watch mode, given the economic uncertainty

‒ In some cases, buyers are resorting to significant negotiation with developers on the pricing front

‒ Expected seasonal uptick in sales during Gudi Padwa in March seems to be a lost opportunity. However, if the business environment improves over the next 2-3 weeks, developers can leverage on positive demand sentiment during the auspicious Akshaya Tritiya in April

‒ Most developers have postponed the launch of their residential projects, except for those which were soft launched

‒ First half of 2020 will be critical for developers who are already faced with liquidity concerns. Even developers with healthy balance sheets are likely to face difficulties with sales expected to witness a massive hit

‒ We expect the residential market to stabilize in the second half of the year, with likely ‘U-shaped’ improvement in economic conditions where there would be some permanent loss of output after the initial shock. Strong pent-up demand combined with rationalised pricing and able support from the government will be key to recovery of the residential sector. This is likely to be further supported by the sharp declining trend with high degree of volatility prevailing in the stock market which is unlikely to experience reversal of trend in near future

Impact on the Real Estate Market

Office ‒ Few large occupiers have begun re-negotiating their lease contracts for lower rents

‒ Occupiers are adopting conservative leasing strategies and have put up decisions regarding fresh take up spaces on hold for the next 4-6 months

‒ Most businesses are deferring their real estate decisions with an enhanced emphasis on managing costs and business continuity plans (BCP)

‒ BCP and work from home (WFH) plans have been successful. From occupiers’ perspective, future demand will always take into account need for flexible workspace (combination of fixed desks and collaboration areas)

‒ Leasing to be mainly driven by renewals and consolidation over the next few months. Further, occupiers are likely to seek lease extensions without lock-in period

Retail ‒ Retail outlets witnessed a 20-22% drop in sales in February 2020 compared to the same period last year

‒ In the first three weeks of March, retail outlets witnessed a 45%-90% drop in sales depending on the number of days the stores were open

‒ Leading retail chains are approaching mall owners / developers to seek waiver or defer payment of rentals for the next few months

‒ Most retail chains are postponing or reconsidering their expansion plans

‒ Limited inventory, operating costs exceeding revenues pose serious threat for retail outlets. Most outlets are running into losses and sustenance might become an issue if the outbreak lasts for more than three months

‒ Most fashion and F&B stores are placing greater emphasis on home delivery services to compensate for losses from their physical stores

What needs to be done to revive the ailing real estate sector?

What needs to be done to revive the real estate sector?Given the economic environment triggered by the health crisis and the resultant dent in consumer sentiments, the Central government with the support of the state governments and the Central Bank have introduced several relief measures for the economically weaker section and the economy at large.

Key measures / incentives by RBI

‒ 75 bps rate cut (bringing down the current repo rate to 4.4%) combined with a reduction of 90 bps in reverse repo rate and other measures have been introduced to infuse liquidity into the system. This is to ensure revival of growth, mitigate impact of covid19 while containing inflation.

‒ Three-month moratorium on all term loans by financial institutions will alleviate short-term liquidity concerns and help developers as well as home buyers survive in these uncertain times. It is a big relief for developers and homebuyers to help them mitigate the challenges faced by them currently.

Key measures / incentives by the Central government

‒ The economic package announced by the Central government is expected to benefit 3.5 crore-registered construction workers.

It is now important for an immediate transmission of these rate cuts and moratorium benefits by banks to the homebuyer, which will boost consumer sentiment.

Accordingly, the state governments should also take necessary steps to utilise the cumulative INR 31,000 crore funds for the welfare of building & construction labourers to help these construction workers who are severely impacted by the economic disruption on the back of the lockdown.

In addition to the above, invoking ‘force majeure’ with respect to COVID-19 under Section 6 of RERA will provide developers extension of project completion timelines and exemption from penal charges in case of any default.

Long-term interventionsThe impact of the above-mentioned measures will be seen in the short to medium term to deal with the challenges faced by different stakeholders within the real estate sector. However, there is a need for the following measures as well to help the real estate sector to gain ground in the long term.

‒ Separate provision for deduction of ‘principal repayment’ on home loans - A separate provision allowing deduction of principal repayment (currently forming part of 80C deduction) will provide homebuyers higher tax benefits towards the latter stage of the loan tenure.

‒ Reduction in holding period of REITs for long-term capital gains - The reduction in holding period from three years to one year while calculating long-term capital gains from REITs will provide a level playing field with competing equity instruments. The Union Budget had proposed tax on dividend income distributed by REITs/InvITs at the hands of unitholders. However, changes introduced to the finance bill has reversed this provision, subject to the special purpose vehicles (SPVs) opting for higher rate of corporate tax.

‒ Reduction in stamp duty to the tune of 100-200 basis points - The reduction in stamp duty will benefit homebuyers and encourage fence-sitters eyeing affordable and mid segment homes to take the plunge.

‒ Revision of circle rates to reflect market trends - The reduction in stamp duty should be accompanied by frequent revisions in the ready reckoner/circle rates. In certain areas, the ready reckoner rates are higher than actual market prices, which translates to a higher stamp duty and negatively impacts both buyers and developers. The ready reckoner/circle rates should be revised on a timely basis to reflect trends in actual market prices. This will benefit both homebuyers and developers.

‒ Further modification in GST - Last year, GST on residential properties outside affordable segment was reduced to 5% without Input Tax Credit (ITC), while GST was levied at 1% without ITC on affordable housing properties. We propose the government to allow developers to claim ITC, which shall result in reduced construction cost for developers. With developers passing on the benefits of decreased costs to buyers in the form of reduced prices, sales of residential units is expected to go up.

‒ Increase in deduction of interest on home loans u/s 24 - An increase in the deduction of interest on home loans for self-occupation from the existing INR 2 lakh to INR 3 lakh will mainly benefit buyers in the lower and mid-income category which constitutes a significant proportion of demand. This is expected to incentivise homebuyers and in turn the residential sector as a whole.

‒ Restriction on setting off loss from house property against other heads of income at INR 2 lakh to be removed - The Finance Bill, 2017 introduced provisions to restrict the set off of loss from house property against other heads of income to INR 2 lakh during the year. The balance loss, if any can be carried forward and set off against income from house property in the subsequent 8 years. The removal of this restriction will enable the individual to claim the entire interest on his let out property without any limit. This is expected to spur higher investments in the housing sector.

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Dr. Samantak DasChief Economist and Head

Research & REIS

Samantak.Das@ap.jll.com

Ankit BhartiyaSenior Executive

Research and REIS

Ankit.Bhartiya@ap.jll.com

Vimal NadarDirector

Research and REIS

Vimal.Nadar@ap.jll.com 

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