Covid-19 impact on affordable housing sector

Developers need to weigh a variety of factors – such as preparation and design, research and development, raw materials, work, and time – when reducing costs. Of these, while meeting the cost, input materials, labor, and time will become a major challenge for the developers. In the midst of the Covid-19 crisis, laborers fled to their respective native lands from the metro cities or major cities in fear of missing out on earnings. The lockdown has prolonged their stay further, which would now trigger a big labor-demand crisis that would have a significant effect on the sector that was already struggling for lack of skilled labor supply

Seeing that the coronavirus pandemic outbreak has slackened economic growth across the globe, it will most likely to take a significant toll on various sectors in India. That will have a multiplier impact on the real estate market that has been seeking revival in the coming years. However, both the industrial and residential segments will face the repercussions of the virus outbreak, and affordable housing will be the worst-hit.

The affordable housing sector has increase with significant growth rate with the help of government initiatives like Pradhan Mantri Awas Yojana (PMAY), which was announced back in 2016, Housing for All by 2022, but this growth gradually decelerated due to various factors and will now fall further due to the Covid-19 woes.

As public-private partnership projects were initiated by the government, developers were reluctant to enter the sector for various reasons, such as land shortages, unrecognised bottlenecks on property records, market dynamism, unfavorable weather conditions, socio-political implications, and skilled labour supply work throughout the project lifecycle.

Recently, the Union Minister for Housing and Urban Affairs in Parliament said that a revised demand assessment had been made and now the demand is for 1,12 crore homes, and he was sure that it can be met in the next month or so in terms of approval. However, the recent survey conducted by a real estate consultancy appears to contrast with the Minister's assertion that inventories of unsold goods in the affordable sector could slightly increase in 2020.

Despite the recent rise in demand for affordable housing, the lockdown came as a significant setback for the market, which was already reeling under crisis. This will further prevent developers from barring into the affordable segment as they already struggled with cost management to boost the bottom line in these projects.

Covid-19 crisis is all about changing the dynamics of the affordable housing segment in real estate. Let's see how:

Developers need to weigh a variety of factors – such as preparation and design, research and development, raw materials, work, and time – when reducing costs. Of these, while meeting the cost, input materials, labor, and time will become a major challenge for the developers.

In the midst of the Covid-19 crisis, laborers fled to their respective native lands from the metro cities or major cities in fear of missing out on earnings. The lockdown has prolonged their stay further, which would now trigger a big labor-demand crisis that would have a significant effect on the sector that was already struggling for lack of skilled labor supply.

Secondly, developers will also face the problem of obtaining cheap raw material as the manufacturing units are closed and they will also feel the heat of laborers' shortage in time. Besides this, producers will still be looking to make up for the loss they experience during the lockout. Developers would, therefore, have yet another uphill challenge to get the material at cheap rates.

With a shortage of manpower, it will also become a big challenge to complete projects on time. Developers raise this problem and ideally, the government will consider offering relaxation for project delivery. Nevertheless, the production delay inevitably results in cost overruns.

In addition to all of these factors, poor buyer sentiment will also hit the segment as buyers will now wait to invest in some form of the housing project. With limited income and concerns of unemployment, affordable home buyers will postpone purchasing decisions, contributing to a rise in unsold inventories. This would result in rental accommodation and more delays in improving consumer feelings.

Currently, the level of economic uncertainty is at an all-time high with the recovery pace hard to foresee. Recently the Reserve Bank of India (RBI) announced a fresh Rs 50,000 crore targeted long-term repo operation to resolve shadow banks and microfinance institutions liquidity stress and indicated the possibility of further rate cuts in the future. RBI high the reverse repo rate to 3.75 percent by 25 basis points. The cut in the reverse repo is a direct sign that RBI needs banks to step up lending, rather than park excess funds with the central bank. Loans provided to real estate companies by NBFCs will provide similar benefits as scheduled commercial banks would provide, thus ease the financial burden on developers.

It can be assumed that the government will soon implement concrete fiscal steps to provide the sector with much-needed stimulus. Assuming that reducing the reverse repo rate to 3.75% from the recent 4% would make lending attractive to financial institutions, which would greatly benefit homebuyers and the real estate industry. In the current period when consumer expectations need to be strengthened, more interest rate cuts, GST, or a special home loan rate will help organised and established developers gain maximum leverage and drive sales in the upcoming period, and will also greatly influence buyers in making a purchase decision.

Such steps are necessary, but it is also necessary not to be able to obstruct the recovery by government rules and policies. Insiders in the commercial real estate investment industry have expressed concern that a liquidity issue could emerge due to policies in place.

However, long-term real estate buyers will consider opportunities to pick up properties at depressed prices and less than most of us have seen in our long career with funding costs. Much as big funds came in to purchase land and homes when prices were low, we'll probably see similar trends take place in the crisis now taking shape. Those buyers will be sure to make all such purchases with diligent due diligence and studious eye.

(The writer is Under Secretary, Ministry of Home Affairs and President, Central Secretariat Services Officers Society)