1. ReCap & Phases
2. Moving on from Covid
3. Roadblocks and Challenges
4. The Way Forward

1. Recap and Phases

Phase 1 (2010-2013): Euphoria phase: New launches, increased capital spending, reduced affordability, instances of fund diversion from one project to another, overall stock at 1.7 million units

Phase 2 (2014-2015): Moderation phase: Decline in new launches, cost overruns and execution delays, reduced loans by banks, rise of NBFCs for funding, PMAY, launch, rise in unsold inventory, overall stock at 1.9 million units.

Phase 3 (2016-2017): Transition phase: Further decline in launches, demonetization, influx of regulatory measures like GST and RERA, transition from unregulated to regulatory regime, delayed recovery, overall stock at 2.3 million units which is 1.67 times more than that of 2010.

Phase 4 (2018-2019): Recovery phase: Rise in launches, consolidation and stability, affordable housing re-establishes customer confidence, government initiative into affordable housing segment, NBFC scams, rationalization of GST rates, decline in unsold inventory and overall stock at 2.6 million units.

Phase 5 (2020 and beyond) Covid & Response phase: New Launches continue, Covid-19 impact, measured response from government in the form of relief packages, reduced moratorium, RERA timeline extension, stamp duty reduction, incentives to customers from developers, ease of home loans, last mile funding for struggling developers called SWAMIH fund, overall stock at 2.8 million units.

2020 was a disastrous year especially with COVID-19 and was felt by real estate sector as both sales and new launches slowed down due to fear and caution of the virus

However, recovery became clearly visible as housing sales in the top seven cities of India in Q4 2020 increased by a staggering 73% on a quarter-on-quarter basis. Demand and drive was led by Pune accounting for almost 23% of the total sales across these cities followed closely by Bangalore (19%), Delhi-NCR (18%) and Mumbai (18%). The recovery continued in Q1 2021 as well, as sales recorded a strong 75% growth on a y-o-y basis, albeit on a lower base. Pune accounted for an approximately 26% share, followed by Mumbai (19%). It was closely followed by Hyderabad and Delhi-NCR with 18% and 17% shares respectively.

• Moving on from Covid

The key to moving on from the Covid debacle is the focus on Housing Affordability. Timely intervention schemes like the reduction of stamp paper duty, extended moratoriums, reduction of home loans etc have largely played a pivotal role for the increase in sales of homes in India.

Over the past few years, the government has proactively undertaken steps to lift and streamline the real estate sector. Key steps undertaken include introduction of RERA and constant amendments in GST slabs.

Affordable housing, particularly, has experienced amplified emphasis from the government due to its potential to drive the growth of the residential segment in the country.

Key Policy Measures by Finance Ministry and Central Government

Finance Ministry

1. Introduction of a fully guaranteed special liquidity scheme worth INR30,000 crore for NBFCs, MFIs, and HFCs.
2. Introduction of an affordable rental accommodation scheme for migrant workers and urban poor under PMAY.
3. A six-month extension of registration and completion dates for all RERA-registered projects whose registration was expiring on or after 25th March 2020.
4. Announcement of INR 18,000 crore outlay for PMAY-Urban, over and above INR 8,000 crore already allocated under the Union Budget.

Central Government

1. Introduction of INR 45,000 crore partial guarantee scheme (PCGS) for NBFCs, MFIs and HFCs.
2. Extension of the CLSS for Mid Income Group (MIG) category by a year till 31 March 2021.
3. Norms for the SWAMIH (Special Window for Affordable & Mid Income Housing) fund relaxed by way of reducing the IRR (Internal Rate of Return)  to 12% from the previous 15%.
4. Increased the differential between circle rate and agreement value in real estate income tax to 20% from the earlier 10%. This was valid on primary sales of residential units of up to INR 2 crore, until 30th June 2020.

Housing Affordability Boost

In the July 2019 budget, the government had provided an additional deduction of interest, amounting to INR 1.5 lakh, for loans taken to purchase an affordable house. This was extended till 31st March 2022 due to the pandemic.To curtail the supply side, the tax holiday for affordable housing projects (provided in Budget 2020) was also extended till 31st March 2022 and also a tax exemption for notified Affordable Rental Housing Projects.

Ease of doing business and financing

Constitution of an Asset Reconstruction Company and Asset Management Company to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors.

For NBFCs with minimum asset size of INR 100 crore, the minimum loan size eligible for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to be reduced from INR 50 lakh to INR 20 lakh.

State Run Initiatives to revive demand (Specific)

Karnataka – Stamp Duty Cut to 3% from earlier 5% for properties valued between INR 35 – 45 lakh.

• Roadblocks and Challenges

While we do witness recovery in Residential Real Estate, developers are still experiencing  issues such as limited availability of credit, tax and regulation complexities, construction delays due to labor shortage caused by reverse migration, higher material costs leading to rising construction costs and the highly leveraged balance sheets of several developers have added another layer of challenge for the sector.

Banks expected to remain selective

Banks in India remain reluctant to lend to developers for most projects, and while they may offer the cheapest source of finance, restrictions by the RBI have done little to help developers gain access to bank credit and the hardest hit will be small time and brand new developers.

NBFCs to remain cautious, disbursements to be selective

Amidst a scenario of shrinking book sizes, rating downgrades and rising borrowing costs, the pandemic has accentuated the problems for NBFCs to disburse fresh loans especially with the IIFL debacle the regulatory bodies will be monitoring disbursements like hawks.

Increasing input / construction costs

Key materials such as steel, cement, copper, aluminum etc. which have a direct bearing on construction costs have witnessed a significant increase in recent months. In addition, labor cost and logistical constraints have exerted pressure more pressure alluding to rising costs. The COVID-19 pandemic has had another direct bearing on the cost in terms of the health, hygiene and sanitization requirements. Input material contractors have also been facing cashflow issues as restarting multiple projects around the same time has added pressure on construction costs along with availability and labor issues.

Labor / Migration issue

The COVID-19-induced lockdown led to a mass reverse labor migration from the cities to small towns and rural areas (a similar situation was witnessed during the second COVID-19 wave).

Regulatory Constraints

The sector faces delays in terms of project completion and delivery as a project has to go through multiple government agencies for liaising, from land acquisition to commencement of construction. RERA  approval process itself could take six to nine months or even more.

• The Way Forward

As the industry adapts to the new normal, it would have to deploy capital, resources and capabilities in the most economical, effective and efficient manner. Furthermore, stakeholders; especially developers would also have to foresee and plan for any future disruption to workforce and project delivery.

Focus on project completion; accelerate sales velocity

Amidst the COVID-19 pandemic, developers across the country opted for various types of discounts and additional schemes, specifically in Q2 and Q3 2020, to attract buyers and revive cash flows via residential sales.

Due diligence, project viability critical to access funding

The NBFC liquidity crisis has brought due diligence by investors into sharper focus. Investors are increasingly becoming selective in their investments, with only projects that display financial viability and profitability being considered for funding. The need for due diligence is even greater in stressed assets, where Asset Reconstruction Companies (ARCs) and Alternative Investment Funds (AIF) are active. As funding is expected to get more selective in the current scenario, it will lead to tighter lending mechanisms being adopted by these investors as most of them would exercise caution and focus on quality projects rather than on balance sheet expansion.

Target to achieve financial closure to ensure project viability

Currently, developers raise funds either through the equity route such as the developer’s own equity, the lender’s equity, private equity and private banks or through debt finance; and by factoring in project cash flows. To ensure that a project remains viable and sustainable in these uncertain times, it is important that developers pay extra attention to parameters such as debt management, interest cost management and cashflow management to achieve timelydelivery of projects.

Technology can help reduce costs and timelines

The residential sector is still in the initial stages of technological innovation. Improvements in construction techniques and adoption of technological processes can help accelerate timelines, improve quality and  in the long run reduce costs.

Better project management for smoothening input price volatility

As of December 2020, reinforcement steel prices in the top cities of India grew by an average of 11%

Year-on- year on account of a rise in global steel prices, shortfall in domestic supply of iron ore and growth in domestic demand for steel. Prices of cement across all major Indian cities witnessed a Year-on- year increase of 4-5% in Q4 2020 owing to a rise in fuel costs.