Due to COVID-19 and the resultant lock-down, the situation has been extremely tough for all the industries and real estate sector is no exception. At a time when real estate sector was already going through tough weather, this pandemic has caused a big blow to the sector. It is a known fact that the real estate industry, especially residential, is facing acute slowdown from last 8 years. Now after COVID we expect a further slump in the demand. Everyone has started talking about further reduction in property prices, however, we need to look into different factors before jumping to any conclusion.
Impact of the pandemic on individuals
It is common sense that the localities/colonies which are fully occupied and developed should not witness much of a reduction, as like any other sector demand & supply equation plays a predominant role in the fixation and movement of real estate prices in the market.
Based on my experience of more than 25 years in the industry, in my view, post COVID, for the first 2 to 3 months there may be a very few desperate sellers who will be willing to sell their properties at discounted prices. We know that distress transactions are a regular phenomenon in this industry, wherein the owner is unable to wait for a price and is willing to bring down the prices to sub-serve some immediate need.
We may note that there is always some demand in these areas as there are buyers who want to buy and settle in such localities. These are not pure investment transactions, but real estate residential transactions, which are consummated for self-occupation / need. This may be due to increase in the family size or due to people being interested in migrating to a better place and options being limited. For such localities and colonies which are perennially in demand, there should not be much of a worry. In these areas, houses are already occupied either by the owners or the tenants, therefore, there is not much of a selling pressure.
The main problem is with the areas which are still under development. Most of the transactions in such areas are done for professional investment purposes by market intermediaries. In such areas there are some investments by actual users also. Such users wait and watch before rushing into such localities, to see how the infrastructure and other amenities are shaping up there. Mostly, such investors are already living in rented accommodations elsewhere and they only have plans to move to such localities in the coming years after the completion of project(s). It is investment in these greenfield localities which is vulnerable to the COVID-19 impact. People who have invested there may think of getting rid of their loans/ liabilities by selling their properties in those areas. People who had purchased property for the purpose of pure investment / returns may also think of selling the same as they don’t see any increase in prices in the near future. This may lead to lot of new inventories of properties entering into the market, which may result in reduction of prices by 15 to 20%.
We need to understand that such buyers have not seen any increase in prices for years and if there is a slump, then they will unfortunately have to loose their hard earned capital (leave alone interest and other expenses which they have incurred on acquisition and maintenance of their investments).
Historically as human beings we always have an emotional attachment with our homes. However, for the past few years we never thought of settling in one specific city or living permanently in one house. In a sense we had become nomadic in our mindsets. When this lockdown happened, it gave a lot of scope for self-introspection for all of us and everyone realized the importance of family and togetherness. The story of lakhs and lakhs of migrant labourers wanting to get back to their homes during the pandemic, shows that they have realised the importance of being with their families in their comfort zones. Each and everyone in our country, wherever one was located at the time of lockdown was singularly thinking of going to their respective hometowns as they have their own houses and families there.
As an aftermath of the pandemic, people may start thinking of owning a house rather than living on rent. But this can happen only if we can get over the anxiety caused by the job losses and normalcy returns at the earliest.
Impact of the pandemic on builders
The builders were already operating on very low margins, as their motive at present was to keep themselves afloat and have some liquidity, so that they can manage the ongoing expenses and let this bad time pass.
Most of the builders have purchased land during the period 2009 to 2014, when the property prices were at their peak. Then comes the new regime, inflation, interest, increase in cost of material and labour etc. Depending upon the duration and depth of the current crisis, the prices may or may not see a downward movement as the holding cost of developers will keep going up while the pressure to liquidate the unsold inventory will keep increasing. Big builders may not want to lower the cost as they have already committed huge investments and they have money to sustain for some more time. But the small builders would like to have liquidity, as they have to meet the construction timelines, as their payments are construction-linked and if they stop the construction, they may not get the balance payments from the already sold units and for that they would like to even sell their personal property to contain the ongoing losses.
Ray of hope & silver lining
The good thing however is that the government has recently proposed and announced various liquidity boosters and soft unsecured loans for SME sector and if the developers get the help as desired by them, they may survive these difficult times.
The buyers may also be encouraged to buy properties at this time, as on the one hand they are expecting the prices to come down and on the other interest rates on home loans have also come down.
During this pandemic and the resultant lock-down, the value of Rupee has come down to its lowest ebb as against the dollar. Further, mutual funds and shares have made people poorer by almost 30 to 40%. People in the last few years have started to invest in mutual funds which may not be the case now. Infact it is unbelievable that an organization like Franklin Templeton has come down singularly because of this lockdown. Property is tangible and it has its own value, as one can touch, feel and see it. It has an emotional connect and property prices don’t fall overnight. NRI’s may want to take advantage of the situation and may want to invest in the residential real estate sector, as all the investment markets including sensex are at an all-time low. In this background real estate apart from gold have emerged as the safest investment options.