While Corona relief gave some breathing space to businesses including the real estate sector, the prolonged geo-political tensions are posing a fresh threat to the nascent recovery process of the realty sector, especially making the going tough for the financially stressed home developers.  Vinod Behl

During two years of the Corona pandemic , household savings had considerably gone up, leading to higher disposable income, resulting in  a positive impact on the sale of housing units. But now amid high inflation due to steep rise in fuel and commodity prices and massive disruption in supply chains, there is an adverse impact on disposable incomes. This poses a fresh challenge to housing demand . And with economic growth rate estimates for the current and upcoming financial year being slashed by the rating agencies, going forward , real estate recovery may get impacted..

This challenging situation comes as a double whammy for the real estate companies , especially small and medium developers who have been facing severe financial crunch and finding it difficult to fund their under construction/stalled projects. These companies have not been getting bank funding Moreover, both bank and non-bank funding have been quite expensive for smaller players, making their projects financially unviable. Now real estate developers are facing an even bigger fund crunch as NBFCs /HFCs (earlier big sources of corporate funding) have drastically curtailed lending to the corporate sector, instead  focusing on retail customers. Bulk (63%)of the stressed loans currently to the tune of Rs 2.5 trillion   were disbursed by NBFCs and HFCs.  Even  stress funding (Rs 25000 crore government backed  SWAMIH Fund) and some funding by the private players is not helping much.

This has compounded the financial woes of debt-ridden real estate developers . In such a situation, their sales are getting affected.and the real estate recovery is getting threatened.Especially as  home buyers’ faith in under construction projects is not getting restored. This is having an adverse impact on inventory overhang, caused by multi-year slump and further  precipitated by covid pandemic. According to JLL, there is over 3.7 lakh crore worth of unsold inventory across India that will take 3.3 years to sell.In Noida/Greater Noida market, there was an overhang of over 50000 units by 2021 end. The older the inventory, the more loss making it is for the developers as they have to pay tax on unsold inventory based on their notional rental income if the inventory is older than two years.

In this backdrop, real estate developers are in a catch 22 situation. If they do not offload their inventory, their cash flows get further stressed, making their loan repayments difficult as it pushes up interest costs  and there is even a risk of payment default. On the other hand if the developers do distress selling, they suffer losses , particularly as due to sharp rise in input costs , their margins have shrunk. Particularly, this is the case with developers operating in the affordable housing space , having low margins.Financially sound big branded developers  may have the capacity to absorb the higher input costs .But  that may not be the case with smaller developers. If they take the risk of increasing prices, it may well adversely impact housing demand and sales.This may even affect new launches which have of late shown promise. Mumbai developers are already talking in terms of increasing residential property prices  by 10-15 percent.

Going forward, the possibility of further Corona disruptions, likely increase in interest rates and higher GST rates owing to proposed merger of GST slabs, may well prove perilous for the residential real estate recovery and growth . And all this will adversely impact the government’s flagship mission-Housing for All.  The government can and should minimise these shocks by taking a host of real-estate friendly initiatives like raising the SWAMIH Fund size to 1 lakh crore, making banks and non-banking organisations meet the funding needs of the real estate sector, deferring any hike in interest rates for a couple of quarters, postponing the merger of GST slabs and instead reduce the prohibitive  GST rates on building materials like cement and steel.