Property Prices to Fall or Increase amidst Covid-19

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The three important factors which have contributed towards robust demand, Jay Goenka, Executive Director at Dynamix Group What has been the impact of the pandemic on the realty market? The covid-19 induced pandemic caused a fundamental disruption to business across the nation and the world. The residential real estate business was no exception. In the days and months that immediately succeeded the lockdown announced in March 2020, real estate transaction volumes cratered. Uncertainty and restricted mobility across the nation prevented consumers from visiting the site offices of projects which were available for sale, fundamentally impairing transaction closure. However, whilst reduced transaction volumes would have normally had a deleterious impact on pricing – i.e. pricing would have adjusted downwards – the fact these reduced volumes were on account of a global force majeur event resulted prices holding at their pre-pandemic levels. And as the country began unlocking, there has been a strong resurgence in residential demand – an arrest of trend which had played out over the past few years. The consequence is that demand is now robust and pricing has firmed up. What have been the changes in consumer preferences? The covid-19 induced pandemic caused a fundamental shift in consumer preferences. When confronted with job insecurity, the first recession since economic data in India was tracked, and a precipitously falling stock market, the consumer viewed her home as a financial and emotional safe haven. Juxtapose the experience of the average renter with that of the average homeowner. Both potentially faced reductions in income - either in the form of reduced salaries or business slowdown (or worse still, layoffs). This reduction in income hurt the renter disproportionately – she ran the real risk of losing the roof over her head because of not being able to pay her monthly rent. By contrast, the homeowner saw EMIs reduce, on account of the fall in the RBI’s benchmark lending rates, and in case she was unable to make EMI payments, a moratorium was offered. For those who owned their homes, liquidity was available in the form of a top-up mortgage or loan against property. The owned home added both, financial and emotional security during this difficult time. There has also been a move towards a desire to own larger homes with amenities again. Cities like Mumbai were experiencing a gradual but marked shift towards smaller (and therefore more affordable) homes. The pandemic put paid to this shift as consumers looked for homes that gave them greater utility in the form of space, in case they had to work from home or spend inordinate amounts of time at home, as we all have done recently. Well planned developments with amenities allowed their residents to enjoy a somewhat similar lifestyle as they did pre-pandemic, as social amenities across the nation were closed. As a consequence, demand improved – and pricing firmed up. What has been the government reaction to real estate crisis? State and Central authorities have introduced a number of policies to stabilise and stimulate markets since the onset of the covid-19 pandemic. Two that stand out have been first, the 115 basis-point reduction of the benchmark repo rate by the Reserve Bank of India and second, the temporal reduction in stamp duty rates for property transactions in Maharashtra. The RBI’s actions have reduced the lending rates on home loans, therefore enhancing affordability – the same monthly income now supports a larger principal loan as the quantum of interest in the EMI has reduced. This allows homebuyers to purchase larger homes, or to buy a home that was previously out of budget. The actions of the State of Maharashtra have also fostered enhanced affordability – a reduction in stamp duty reduces the overall ‘ticket size’ of the purchase whilst keeping prices intact. Again, the consumer is therefore able to purchase a larger or slightly dearer home than previously. The result of this policy action has been widely reported – in the MMR alone, property registrations in December 2020 were the highest ever – with 48,624 units sold. A recent CRE Matrix report states that property registrations in January 2021 too are 33% higher than the numbers for the corresponding year previously, with a 14% growth in the average value of the unit sold and registered. The higher value will be a function of larger units getting consumed, and in some places, price appreciation. What are the changes that will have a long term effect? The structural changes which have been at play over the past few years have had and will continue to have a sustained impact on pricing of residential real estate. Three such changes are firstly, the credit crunch which developers faced as a result of the IL&FS catalysed ‘NBFC Crisis’ and the general reluctance of banks to lend to real estate projects. With large NBFCs facing an existential crisis, credit has been sparsely available to real estate developers. For the past three years, lenders have been now far more demanding – and somewhat circumspect – in lending to the sector. The result is that developers have relied on more expensive capital sources – foreign private equity lenders being those who have recently partially filled the void left by NBFCs and banks. A lot of projects cannot afford this cost of capital unless prices hold or increase. The result was that a lot of planned residential supply was shelved. Secondly, the regulatory environment across the MMR has been in a state of flux for the past thirty months. Mumbai saw the introduction of the Development Control and Promotion Regulations, 2034 (DCPR 2034) in November 2018, after four years of tumult in its publication. And recently, areas in Maharashtra outside of Mumbai saw the introduction of the Unified DCPR. Both pieces of legislation were long expected and subject to substantial change over the course of their evolution, creating uncertainty and halting supply. And finally, with some micro markets – South and Central Mumbai for example – struggling with oversupply conditions, which oversupply found an outsized voice in the media, developers pivoted away from residential real estate and towards other real estate asset classes. These factors all reduced planned and ongoing supply, whilst demand, though still subdued, continued steadily. The result is that the MMR region today has an ‘inventory overhang’ (the number of months it will take for existing supply to be consumed, on the basis of current average demand trends) of 19 months, down from a peak of 39 months in Q3 CY2017. The numbers for Mumbai are 20 months and 47 months respectively. Supply is therefore now at far lower levels than in the recent past, a fact which augurs well for price stability in the near future.