The Real Estate Pile-Up
Developers are sitting on unsold inventory worth Rs 3,700 billion. June 2020
As the report points out, real estate, which can be broadly categorised into residential housing and commercial sales and commercial leasing (office, mall and industrial space), has a multiplier effect on myriad industries. Characterising the year 2019 as a “mixed bag”, CARE Ratings shares that the industry attracted investments worth around $ 5 billion; around 66 per cent of these were in commercial real estate, which witnessed a healthy 27 per cent increase in volumes year in year. Residential housing demand, however, has been sluggish with lower absorption of late owing to structural reforms such as RERA, demonetisation and GST as well as economic slowdown, the NBFC crisis and low buyer sentiment.
The nationwide lockdown has only made matters worse—construction activity has come to a grinding halt with disrupted material supply chains, re-migration of labour and non-availability of transport. Return to normalcy will take time and be exacerbated by delay in approvals as well as buyers becoming risk-averse in the medium term.
In the residential segment, although price points may soften, this would depend on the type of project. In the short term, companies may experience weakened cash flows and financing and funding difficulties; here, developers with greater financial flexibility and liquidity would fare better. Commercial real estate is also expected to experience a slowdown, largely in the coworking space, owing to the increasing popularity of the ‘work from home’ option. Further, FDI in commercial real estate is expected to be on hold owing to limited new leasing activity and the economic struggles of countries like the US, Singapore, Hong Kong and China—typically the source of major investments.
In the malls segment, footfalls may take some time to revive causing an impact on cash flows in the short term. Again, companies with higher financial flexibility and better liquidity will fare better. In the medium term, CARE Ratings expects some correction for mall space leasing while lease rentals are expected to remain firm for office space leasing and commercial warehousing—while e-commerce expected to pick up steam once again after the lockdown.
Mitigating factors to provide relief to developers include the RBI’s three-month moratorium on term loan repayments and interest on working capital till May 31 2020, and MahaRERA’s three-month extension of the period of validity for registration of all projects where completion date, revised completion date or extended completion date expires on or after March 15, 2020. The report also informs that the Government is set to move an ordinance to suspend fresh insolvency action against companies for six months by lenders or creditors—this would protect developers from action from financial creditors, including home buyers.
That said, the outlook for the real-estate sector remains negative—any revival post lockdown will take time with slowdown in construction activity and weakened cash flows, impacting credit quality. The silver lining, though, could be the commercial real estate segment and warehousing leasing activity, which are predicted to recover faster than other real-estate asset classes.
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