It is largely acknowledged and accepted that the current pandemic and resultant lockdown is the biggest economic crisis in nearly last 100 years, much bigger than the 2008 financial crisis. While India may still be able to grow, but there is likely to be a sharp deceleration in growth with IMF predicting a growth of 1.9% in the fiscal year 2020-21.
No surprises, the various sectors of the economy have already started facing the pinch, including the real estate sector.
According to a recent report released by our Group company- PropTiger.com, housing sales in India’s prime residential markets declined 26% during the last quarter of FY20 amid the government imposing a lockdown in March in order to contain the effects of the coronavirus pandemic. A total of 69,235 units were sold during the quarter ended March as against 93,936 units sold during the same quarter last fiscal. Even more worrisome is the fact that the sector is saddled by unsold inventory to the tune of 7.5 lakh units across the nine major markets. The inventory overhang, which is the time builders are expected to take to sell off the existing stock, stands at 27 months, exactly the same as the past three quarters.
Needless to say, the going will be rather difficult for the sector, which is one of the biggest employment generators as well as one of the most significant contributors to GDP of the country. With several organisations announcing pay cuts and retrenchment, the purchasing power of the potential homebuyers is likely to witness a dip, which in turn will further the problem of the sector. The downturn in the sector will also adversely impact around 300-odd ancillary industries, which depends upon the sector for its growth and survival. Thus, it will have several economic repercussions for the country as a whole.
Loan restructuring is urgently required
It is a well-known fact that the real estate sector is passing through a challenging phase for some time now. Even during the last financial year, the situation was not much different during the first 9 month of financial year. When compared to the first nine months of FY19, sales fell by 13 per cent during the same period of FY20. As against 263,294 units last year, only 228,220 housing units were sold this year. The current pandemic has only precipitated the crisis.
In such a scenario, it will be extremely difficult for most of the developers to manage enough cash flow so as to continue construction activities, pay salaries as well as make vendor payment and at the same time keep servicing loan obligations. Thus, the need of the hour is that the Government or the Reserve Bank of India should announce one-time loan restructuring by one year for all loans to real estate. This would ensure that real estate developers have enough monies in their hands to complete the projects on time, which is imperative to regain the lost confidence of homebuyers. The move if implemented will also ensure more funds with financial institutions as they would not be required to make additional provisions.
Several experts, including HDFC Chairman Deepak Parekh, has advocated such a move as in its absence, it would be difficult for financial institutions to provide additional liquidity to the sector.
NBFCs will also benefit
Post demonetization, banks were extremely reluctant to lend to the real estate sector. Instead, they preferred lending to NBFCs. As per RBI data, banks advances to NBFCs till December 2016 stood at around Rs 3.2 trillion but surged to Rs 7.3 trillion by December 2019. NBFCs, in turn, lent aggressively to the real estate sector assuming that developers would be able to complete their projects, sell off their inventories, and then repay. But sadly that has not been the case and NBFCs are faced with major default from developers. Such a situation will be catastrophe for not just NBFC sector, but entire financial sector.
Already as a result of the IL&FS and DHFL crisis, the entire NBFC sector is facing liquidity crunch for the last 1-2 years. Both deposit and lending activities of NBFCs have taken a hit and that has also adversely impacted the credit flow to all the sectors, including real estate. Any further increase in stressed assets will only make the going tougher for NBFCs. Thus, one-time loan restructuring besides helping the real estate sector will also help the NBFC sector tide over the current crisis. The sooner it is announced, better it is.