Real Estate sector staring at payment defaults amid Covid-19 lockdown

The Covid-19 pandemic is slated to have a ‘catastrophic effect’ on India’s troubled real estate sector, which is currently worth around $12 billion.

According to the Indian Chamber of Commerce (ICC) release: “The real estate sector, already in a slump since last year, is presently experiencing almost 65% payment default from customers paying the instalments linked to construction.”

Besides, the lockdown has created a drastic drop in residential sales with no clarity on a revival. “New launches of residential units may also witness a 25% – 30% decline to anywhere between 1.66 lakh – 1.78 lakh units,” said ICC.

Within the residential space, the affordable housing segment (in which units are priced below Rs 50 lakh) seems to be the worst hit. According to property consultancy firm Anarock, 6.1 lakh affordable housing units were under construction across the top seven cities in the country until the lockdown was announced. This is over 39% of the total 15.62 lakh under-construction units in the top seven cities—the highest share of all budget categories.

“The target audience typically has limited income and unemployment fears currently loom large. This could result in deferred property purchase decisions in 2020 and ultimately derail the segments’ growth momentum. As a result, unsold affordable stock can rise by 1% – 2% on a y-o-y basis,” said Anuj Puri, chairman, Anarock Property Consultants.

At present, international trade restrictions have halted the supply of essential raw materials to the real estate sector. And China, which has been the epicentre of the Covid-19 pandemic, happens to be the biggest supplier of raw materials such as steel to the Indian real estate industry.

While the present crisis could lead to a shortage of supplies and a subsequent price escalation, withdrawal of such supplies can be a good opportunity for Indian manufacturers to expand in the domestic market. To facilitate this opportunity of expansion of Indian market, the government should contemplate restructuring the tax component of such supplies, said Rajeev Singh, director general of ICC.

Industry body NAREDCO president Niranjan Hiranandani estimates that the real estate sector has piled up losses to the tune of Rs 1 lakh crore, which continues to rise with each passing day. After the pandemic, he estimated delays in ongoing projects to range from three months to a year and half, depending upon the stage of the project and location, among other factors.

ICC has put forward a suggestion that the real estate sector should be supported by all state governments by way of a waiver of “municipal taxes for at least one quarter”. Additionally, “organisations which are not able to clear up taxes or bills should not be penalised and be given around three to six months time for repayment of the same”.

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