'Black Swan' for realty sector

Greater Kashmir

Even as the outbreak of COVID-19 pandemic has unleashed a widespread impact on all sectors of the economy and everyday life, it’s the real estate sector which has been witnessing mass business closures. Halt in under-construction projects, especially in residential housing segment, is proving major headache for builders and the investors. The situation has significantly eroded the market of its potential buyer-base. With property transactions dipping to near-zero during the pandemic-induced lockdown, the sector is now fully loaded with huge challenges for times ahead.

The impact of COVID pandemic is being considered as the third ‘Black Swan’ event for the realty sector in the last five years. Earlier demonetization of high value currency notes of Rs.500 and Rs.1000 in 2016 and the implementation of the Real Estate (Regulation and Development) Act, 2016 played havoc with the sector.

A ‘Black Swan’ is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.

Meanwhile, in the local (J&K) context, investment in real estate outside the state especially in northern part of the country has been a growing passion among the local investors. Most of these local investors, mostly Kashmiris, have twin objectives to meet. First, they want to secure an alternative safe living place at a time when the conflict intensifies and living a normal life becomes a challenge. Second, they simultaneously want to secure high returns on investment as some time back investment in real estate was believed to be a golden investment.

Interestingly, the growing appetite of people here to have housing property outside J&K attracted local property dealers and they too started expanding their real estate ventures outside the state, mostly in Delhi, Uttar Pradesh and Haryana.  This combination of local property dealers and the local investors has become a convenient means of flight of capital from J&K to other parts of the country. Initially, this looked prosperous for both. But over a period of time, the investment has lost sheen and many investors found their money locked in the troubled waters of the real estate sector in the country. At the moment, those who have invested in under-construction properties are the worst sufferers, as the ongoing COVID crisis has dashed any hope of recovery of the sector from slump.

Generally speaking, the pandemic has taken a huge toll on the real estate sector with construction activity coming to a grinding halt. In this situation, the worst sufferers have been the homebuyers who are helplessly waiting for the possession of an under-construction house or are planning to buy a new one.

Has COVID pandemic pushed the investment in under-construction properties in high risk zone?

Two major developments, demonetization and implementation of the Real Estate (Regulation and Development) Act, 2016, precisely referred as RERA, had already left the real estate sector, especially the under-construction projects,  in shambles. The financial resources of builders and developers got a hit when the non-banking finance companies (NBFCs), one of the few lending sources of the real estate sector, were confronted with shrinking financial resources to fund real estate projects.

Precisely, in post-COVID scenario, the sector was already facing financial problems. Earlier, funds for such projects were raised at ease through  bank loans and  private equity (PE). Even investors were lured to park their funds in the sector. But, several problems cropped up in the sector and investors started maintaining a distance. Besides, the banks too exercised caution in lending to the sector as the future outlook appeared ‘problematic’ and default in repayment of loans was increasing.

Since NBFCs were caught in the web of IL&FS crisis, and left with liquidity issue, the real estate sector lost this financial resource also and faced funds starvation. Now the pandemic has added more to the woes of sector. The under- construction housing projects, which were already delayed for delivery to respective investors (buyers) would not be completed in the given time. There would be breach of commitment on part of the developers and sufferer would be the buyer. There is every possibility that majority of the constructions would not continue for want of funds.

So, in the given crisis, investing in a property especially in the under-construction residential segment is highly risky and one has to be more cautious while making a decision. You may witness drop in the prices of under-construction property as the developers would be looking to manage liquidity position. But don’t get lured. Investing in incomplete properties is a risky proportion, at least in the given scenario.

Now, what should you do in the current scenario?

Those who have already made a portion of investment in the under-construction property have to face stressful time. Getting possession of the property would be a major worry and they will be left at the mercy of the builders. They have no option but to accept the delay. However, those who are thinking to invest in a property, they should look for ready-to-move property. This way, there would be no risk like project delay.

What are the consequences which existing homebuyers have to face?

The existing home buyers who are waiting to get possession of their property have to brace-up themselves to face delays and losses. As mentioned above, the wait will become longer. Arranging financial resources and mobilizing worforce to resume construction is a huge challenge for builders and developers. It may take lot of time to mobilize these resources to re-initiate any activity at these sites even after the lockdown is over.

Who will compensate the homebuyers for the delay?

Frankly speaking, don’t expect a compensation for the delay. Even as Real Estate (Regulation and Development) Act, 2016 (Rera Act), envisages that developers are required to pay a penalty for each month of delay in project delivery, the given unforeseen pandemic situation bails them out from paying any penalty for delay. Compensation for delay comes into play only if there’s an intentional delay from the developer. According to the Rera Act, the registration granted for a project can be extended by a year due to the force majeure clause. During such extension, developers are not required to pay compensation for delay.

Will property prices go down?

There is difference of opinions among experts. Some believe that prices may go down post covid-19 to boost demand and have advised the developers to reduce the prices of properties by as much as 20% to clear the inventory and overcome the situation.

However, other experts rule out such price correction. It’s believed that developers with high unsold inventory facing financial crunch may cut prices. However, the price cuts will essentially depend on the financial position of the developers. A developer facing financial crunch will most likely go for price cut to sell his unsold inventory to lay hand on funds quickly.

Meanwhile, in the given situation, experts suggest that you should buy property only for self-use and not for investment.