The realty market, in deep freeze for some time, is now in the ICU; and no one knows how many realtors wi l l survive the storms of the pandemic. In these trying times, there has been a regular flow of good advice from ministers and industry captains, urging builders to bite the bullet, cut prices voluntarily, and help stoke demand.
Last Wednesday, Union Railways Minister Piyush Goyal caused quite a stir when at a developers’ webinar, he advised: “Unless you reduce your rates, you are stuck with material. You can choose to be stuck with your material and default in the bank till the material goes away. Or you can choose to get rid of whatever you bought at high prices; look at it as a bad decision or an unfortunate situation and move forward,” said Goyal.
Sell at any cost Banker Uday Kotak backed Goyal soon after. Speaking at a press conference of the Confederation of Indian Industries (CII), Kotak said: “I recommend that every real estate player move inventory and clear the stock they have. They should not be looking at the rear-view mirror while driving a car, but looking in front.”
Earlier, in April, HDFC chairman Deepak Parekh cautioned builders to be prepared for the market to bottom out at levels below their expectations. “I think the prices of real estate have to come down... I feel one must be prepared for even 20 per cent,” Parekh said on video conference.
The builders are not convinced. At these webinars, they were vocal that it was not possible to reduce prices further as the high cost of land acquisition and development would put them out of pocket.
The unstated rationale voiced in private is that they are prisoners of their investors to whom they have pledged a certain margin of profit. But Uday Kotak’s message was crystal clear.
“If land was bought at a high price in the past, it is irrelevant today. Bringing down prices and clearing inventory is good for all.” The main challenge is consumer confidence has caved in.
The Reserve Bank (RBI), which has just released its survey, said consumer confidence had collapsed in May with the Current Situation Index (CSI) touching a historic low. The expectation is the economy will contract 1.5 per cent as demand evaporates.
“Overall consumer spending remained afloat, mostly due to relative inelasticity in essential spending; consumers, however, reported sharp cuts in discretionary spending and also do not expect much improvement in the coming year,” the Consumer Confidence Survey (CCS) said.
Builders are in trouble as buying a home, a car or going on a holiday are the usual discretionary spends; and these are vanishing as the days ahead look tougher.
Demand evaporates Commercial real estate too, which earlier was showing signs of stabilization, is now in the throes of a crisis. Anarock Property Consultants estimated that “net absorption in 2020 will drop by 17 per cent to 34 per cent from the pre-Covid-19 estimates”.
Commercial leasing in India is driven by US companies picking up nearly 50 per cent of the office space available. With the US economy among the worst impacted, the tremors will be felt in a big way in India, the Anarock report said. Commercial real estate will also see a big withdrawal in demand from the change in workplace practices among corporate groups.
For instance, the work-from-home routine, initially adopted as an emergency practice, seems to have worked well for a number of companies making it a permanent option.
IT major Cognizant is believed to have distributed 78,000 laptops to its associates. These practices in the long run will reduce reliance on office space and save huge rentals for companies. Residential real estate on the other hand always has takers as the need for a home can be postponed but never shelved permanently.
Home-buying typically is very sensitive to prices, and that is what minister Goyal and Uday Kotak are advising. At the right price, there will always be a buyer. However, statements at a webinar need to be matched by government policy. The RBI has cut the bank repo rate by a solid 115 points infusing a high degree of liquidity in the financial system.
Unfortunately, the benefits of lower interest rates are not being passed on proportionately to the consumer. Again, the ready reckoner rates (RR), also called the circle rates of property (based on which stamp duty and registration fees are levied), are often far higher than prevailing market rates.
Property sold at rates below the RR or Circle rate can attract stiff penalties from the Income Tax department under Section 43 CA of the IT Act. More than words, a proactive push by the government could work wonders for the stagnant market.