Indian Real Estate 2020AC (After COVID) – A Full Reset

All, Miscellaneous, Realty

MACRO OVERVIEW

1) Central Governments across the world have provided massive stimulus to solve the economic problems arising due to the COVID-19 crisis, however, it is still likely that the United States and most parts of Europe are going to go into recession in 2020, impacting global growth.

 

2) As developed countries fire-fight problems in their own country, capital flows will be restricted to emerging economies like India in 2020. Two reasons: a) Post the recent correction, the Dollar adjusted returns in their home countries are comparable to those in emerging markets, b) National interests will supersede global interests; we will see more Nationalism and Regionalism in 2020. 

 

3) The Indian government has made it clear that their priority is to tackle the health crisis first and then look at the economic impact, which is the right call given the fragility of our healthcare system.

 

4) India’s Sovereign rating is BBB-, the Lowest Investment Grade. If it gets further downgraded to below Investment Grade (Junk), that would in turn severely affect the economy. This is one of the reasons why it will be difficult for the Indian Government to print money and expand the balance sheet significantly. 

 

5) Most economists think Indian GDP growth will be around 2% in FY21, this will put pressure on the overall economy and lead to unemployment challenges. On the positive side, the sharp fall in Oil prices will definitely benefit India; this will help manage the current account and inflation. Additionally, India’s large foreign exchange reserves of >$450 billion is reassuring during this crisis period. 

 

INDIAN REAL ESTATE SECTOR 

1) The Indian Real Estate sector has had a tough run over the last few years; there was optimism that on the back of strong Commercial Real Estate demand in 2019, the Residential market (which accounts for approx. 75%-80% of Indian Real Estate) could see a revival in 2020. However, the COVID-19 related economic crisis has derailed this recovery.

 

2) NBFCs who have done most of the heavy lifting when it comes to providing liquidity to the Real Estate sector in recent years are dealing with their own set of liquidity problems. While some of them had worked on raising capital to solve the near-term Liability side issues on their Balance Sheet, they will now need to very closely monitor the Asset side, and in many cases, look at restructuring loans. Unless the RBI steps in with remedial measures, it is expected that Banks and NBFCs will need to recognize of a lot more NPAs in FY21.

 

3) It is unlikely that global capital will flock to the distressed opportunities in the Indian Real Estate sector. The financial returns in their home country on a Dollar and risk-adjusted basis, may appear much more attractive, in the near term.

Sector overview:

- Residential - Prices are expected to come down by at least 15-20% in most micro markets. However, with a lower number of launches in the last couple years and improving (albeit slowly) demand, the unsold inventory is reaching more palatable levels + mortgage rates are also trending lower - both positive signs!

 

- Commercial – 2019 was one of the strongest years for Commercial Real estate with record absorption of >60mn sqft. However, 2020 will be a very challenging year; absorption may be 30-40% lower than 2019 coupled with rental yield and collection pressures. 

 

- Retail and Hospitality – Unfortunately, this sector will face severe headwinds; the Government will need to come out with measures to ensure they have a softer landing. 

 

- Industrial, Warehousing – A small, but fast-growing space in Indian Real Estate. This may be the bright spark within Real Estate in 2020, due to the demand from e-commerce and manufacturing. 

 

 

RECOMMENDATIONS TO INDUSTRY STAKEHOLDERS

Government:

1) The Construction and Real Estate sector, after Agriculture, is the largest employer in the country. Keeping this in mind, rational demands made by the various Industry Associations should be debated seriously and implemented.

 

2) A large stimulus is needed to support the sector, similar to a TARP (Troubled Asset Relief Program) the United States instituted post the 2008 Global Financial Crisis, or maybe issue tax-free bonds for the Real Estate sector.

 

3) Banks and especially NBFCs need to be given the support to continue lending to the Real Estate sector. It is estimated that approximately Rs. 700,000 Cr has been collectively lent to the sector; if the liquidity stops flowing to complete ongoing projects, a large part of this capital will come under severe stress. Many more funds like SBI Capital’s SWAMIH fund are required to help provide liquidity to the sector. 

 

4) Subvention schemes should be re-allowed for home buyers. The consumer neither has the confidence nor the Capital to make investments in this uncertain environment. One needs to provide support to them in order to bring them back to buying Real Estate. 

 

5) Help ease the cost pressure on Projects by reducing GST rates on Works Contracts and allowing input credit on project sales. Additionally, the State Governments need to revisit ready reckoner rates, reduce stamp duty, premiums and levies charged on projects as these are making many projects unviable. 

 

Financial Institutions

1) The RBI needs to allow a one-time restructuring of loans like they did in 2008. Current norms may also need to be relaxed to allow the trading of these loans so that distressed funds can come in with much-needed liquidity. 

 

2) The RBI should also look at buying Commercial Paper, Private Debt like many other Countries have recently done. This will send a strong message and improve liquidity in the system. 

 

3) Banks should pass on the benefit of lower Interest rates to the Developers and Consumers immediately.

 

4) Banks and NBFCs should closely monitor each project cash flow and help the developers stay on track. It is a collective responsibility of all stakeholders in the Industry to bring the confidence back.

 

Developers

1) ‘The key to strategy is to know what not to do’ – if you are a land aggregator-turned- developer, tie up with someone who has Development and Financing (plus Cash Flow management) capabilities. Collaborative joint ventures and joint development agreements are needed; the Industry cannot risk the consumer being bitten again due to inefficient players and stalled projects. 

 

2) The environment is challenging, but work on capitalizing projects at whatever the cost may be - high interest rates or a steep reduction in expected sale price. Survive this time; there will be many years and lots of opportunity in Indian Real Estate to thrive after surviving. 

 

3) Focus on how much concrete you have poured in a month, as opposed to project profits. The market will determine price, developers should focus on raising capital and pouring concrete.

 

4) Constantly engage with the channel partner (broker), vendor and supplier networks. The Real Estate sector is going to have a challenging road ahead; one needs as many evangelists, well-wishers and industry relationships as possible, so that all stakeholders come out stronger. 

 

Consumers 

1) Post the expected 15-20% price correction, on a risk-adjusted basis the Residential Real Estate market is looking attractive in most micro markets across India. Cost of capital is also trending downwards for home buyers. While we are not calling a bottom, if you are looking to buy a home, this is a very good time to start doing active research. 

 

2) There are many credible developers and good projects in each micro market. Read the project details on the RERA website and study the track record of the developer. 

 

 

The Indian Real Estate sector needs liquidity! As much as it will absorb liquidity in any form, the sector really needs liquidity in the form of equity. The consumer and retail investors need to come back into the market in order to help revive what has been a very lucrative asset class, since independence. However, this may need a repricing of inventory, loans and land. A Full Reset. 

 

 

Stay Safe!

Team SILA

 

Please Note: Information sourced from multiple Industry reports, webinars and our assessment of the current environment.

 

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