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COVID-19: The Death Of Real Estate Investing

Real Estate Downfall

Since the coronavirus crisis has forced the economy in a downward spiral, the already struggling real estate sector had little chance of springing back into action. In my previous articles about the stock market I have mentioned that the capital market is not an indicator of economic performance of any country. That is why we are witnessing record high market rallies even though we are in the worst recession in our country’s history.

Real estate on the other hand serves as a very good indicator to accurately convey the buyer’s sentiments. According to an ANAROCK consumer sentiment survery which was an attempt to gauge home-buyers’ preferences during pandemic, among other things home ownership is not on the priority list of the average new-age millennial. Let’s figure out why.

The Economy Is Not Trustworthy!

It should not come as a surprise that real estate is more of an investment than it is a commodity.Indian GDP y-o-y People has a proclivity towards the ‘safe investment’ as real estate is a physical immovable asset which will go up in value. However, that notion is going down the drain.

The market disruption responsible for this is quite simply the failure of our economy. We were riding on the waves of an economic slump even before the pandemic began, I am not optimistic enough to assume that things are going to get better.

With a slumping GDP and all time low per-capita incomes, it was no wonder that real estate sales were going down. After all, what was the incentive in going through all the hassle and buying a property which you couldn’t even sell on your rainy day.

HDFC Chairman, Mr Deepak Parekh noted that he sees a drop of 20% in property prices of unsold residential inventory and advised developers to offload their stocks to enhance liquidity position. A report by HDFC securities noted that large NBFCs expect a further 20-25 percent slash in real estate prices and a 25-30 percent dip in volumes for FY 2021.

The biggest challenge in the market today is the revival of demand. That can be achieved either by reducing property prices, bringing down the cost of financing or mortgage rates and introducing a better tax structure for both direct and indirect taxes.

– Anckur Srivasttava, GenReal Advisers

However, the problem with such incentives is that it may backfire. High ticket purchases such as real estate assets are still primarily driven by consumer sentiment and perception. Under those considerations it is very difficult to implement measures that will restore demand of such assets and revive the sector.

This is the issue with real estate on the sales side, a far pressing issue compliments this problem further.

The Exodus of Migrant Workers

Migrant workers returning from Ahmedabad to their home state of Uttar Pradesh.

India’s prominent cities have been built by the blood and sweat of it’s migrant workers, there can be no second opinions on that. As per 2011 census, there are 45.36 crore total internal migrants in India. That amounts for about 37% of the country’s population. Subsequent research suggest incremental increase in these figure amounting to an astounding 100 million as of today.

The same research also shows that most of these migrant workers (73%) were engaged in construction work across cities like Delhi, Mumbai, Hyderabad, and Bangalore with upwards of 70% of their workers leaving, it has the developers in a frenzy as to how ongoing projects will be salvaged.

This will further bootstrap the sector. The ensuing panic was evidenced by politicians urging migrant workers to stay back. These millions of migrant workers were left jobless owing to the immediate and ill planned nationwide lockdown and the general sentiment among them is to not return even when the pandemic has passed.

The bitter experience they have had has left them traumatised and we know that most of them will not even think about coming back to work in the near future.
-Kishore Jain, Realtor from Bangalore

There’s a distinct clash and a certain Dunning-Kruger syndrome to be seen with Industrialists who are predicting that eventually these workers will be forced to come back because of lack of options. That is in stark contrast with what social scientists had computed. Labour economists mapping this phenomenon predict that migrant workers will be reluctant to undertake the same long-distance trip with the trauma of how they suffered.

When it comes to real estate, industrialists around the nation are asking locals to join forces and are planning on mechanising much of the workforce. That too is a plan built on quicksand because such mechanisation will have to be imported from China, given the Indo-China relations and trade embargo, that is an unlikely event to occur.

Trends which matter.

The pandemic has changed the new normal. What would be over the top and unexpected even months ago, is the new socially acceptable norm. On an industrial scale too, things have changed. So, here are some trends which are impacting the market.

  • Commercial Real Estate Is In A State of Decline
    Malls, Warehouses, etc, are examples of commercial real estates. It has always been a far safer bet than residential real estate because even if there are no retail buyers, companies looking to expand their operations will always be there. However, that is changing. The very reason migrant workers are wary of returning is the reason why businesses are moving towards remote operations. The fear that such a pandemic may re-surface and cause similar disruption is real and that has resulted in businesses moving online, cutting down on office spaces, etc.

Office utilisation rates will decline as remote functioning will increase and landlords exposed to short term leases delay investment activity and earlier forecasts compared to the increase in rent will be the biggest risk.
– JJL Report

  • Sales Will be Mostly Driven Online
    Real Estate agents are in a frenzy over adopting new methods to drive sales. New and improved techniques are in the process of being introduced to the largely unchanged domain of real estate sales. Due to the pandemic, site viewing will not be possible and the subsequent effects of that will likely continue onto the upcoming years.
    The trickle down effect of this was evident in ANAROCK’s survey as well, luxury buyers are mostly elderly people who are not well acquainted with video calling technologies for virtual house tours. That has led to a decline in such sales as well.
  • Financial Institutions Will Be Averse to Giving Loans
    In a previous article I expounded on the steps taken by the government to extend loans en-masse. Now, such huge loan sanctions have emptied the bank coffers and they are generally unwilling to extend to loans to anyone other than the most secure buyers. That is a double edged sword. Due to years of real estate being under the weather, developers are at an all time down when it comes to credit score. That combined with the poor sales figures paint a very bad picture for the industry capital.

Closing Remarks

Without a doubt, real estate will spring back to action. India is a very populous nation and housing is a prime requirement to sustain the mammoth growth that India is poised to have. However, that would require extensive government intervention with regards to tax breaks, policies in favour of sustainable development. Moreover, developers will have to understand the market requirements and act accordingly.

All things considered, we have been through worse and we most certainly will again. The market will always point to a positive in the long term.

About the author

Sayon Bhattacharya

A student, Quant Dev, Finance & Capital Market Enthusiast, and now a blogger on The Indian Wire living in the Financial Capital of India, Mumbai. Sayon is a multi faceted individual with limitless enthusiasm to enlighten the uninitiated in the realm of Finance and Business. He enjoys sharing his knowledge and understanding of current and core happenings in these domains with startling simplicity and ease of understanding. Stay tuned to know more about the latest happenings and be up to date with the market.

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