Samir Shah, a stock picking guru, believes the pandemic could give rise to alluring property deals in India. Buying an apartment has been on Shah’s mind for the past two and a half years, but high prices kept him out of the market. But this may be the time for buyers like himself, he says.
“Once the impact of Covid-19 eases one may get properties up to 20% cheaper,’’ predicts Shah, who has been working from home since mid-March as the coronavirus began sweeping across India. “Builders are short of funds and have huge inventory piled up. Banks are wary of lending to them. Prices should fall.’’
Demand certainly is. As the pandemic started restricting movement and claiming livelihoods, buyers have slammed the brakes on their purchasing plans. Property sales fell nearly 30% in the first quarter year on year, Ramesh Nair, chief executive officer and country head of India JLL said in a note.
Builders fear worse could be in store in the second quarter.
“[The] coronavirus has knocked a deadly blow to the real estate sector in India,’’ said Mahendra Salunkhe, owner of M K Builders and Developers in Mumbai. “Demand has been very low and there is no cash in the market.
An average buyer, who may lose his job because of the lockdown, will stop paying his loan installments and that will trigger a chain reaction,’’ he said.
Sales were already slowing in recent years. Anarock Research said out of 644,000 unsold apartments in India’s top seven cities, 78,000 of them worth 660 billion rupees ($9 billion) are vacant.
Of the almost 1.6 million apartments now under construction, 40% are for those with modest budgets. The pandemic could reduce housing sales by up to 35% and offices rentals by 30%, it projects.
“The lockdown will translate into a vicious sequence of stalled construction, delays in project deliveries, delays in loan repayments and debt servicing to banks and an overall slump in demand due to uncertainties in employment and salary cuts. All these factors have marred the future sentiment score of stakeholders,” said a recent survey by Knight Frank, property consultants.
Another survey by property site Magicbricks showed that one in every three home buyers want to drop or put on hold their buying plans. An estimated 73% of buyers are likely to reduce their budget and delay their purchases by up to nine months, Magicbricks predicted.
“This crisis has retracted end-user confidence to its lowest levels ever, which will push any kind of real estate purchase decisions to the distant future,’’ Shishir Baijal, chairman and managing director of Knight Frank India said in a statement.
Blame it on Covid-19. India imposed a countrywide lockdown beginning on March 24, shuttering factories and services and making millions unemployed in the process. Asia’s third largest economy could see zero or even negative gross domestic product (GDP) growth this year, a sharp plunge from the 4.7% seen in the third quarter of fiscal 2019.
But for those who still have a steady income, property deals could be unprecedented. Buying a house in India is a life event almost as significant as marriage.
Affordability has improved over the years. In 1995, it took 22 years of an individual’s salary to fund an average house. Today a buyer needs only 3.5 years to pay off their mortgage. But the market is extremely price sensitive.
Still, property purchases have not been the best of investments. After a sharp price surge in the beginning of the millennium, India’s property prices have generally stagnated since the global financial crisis of 2008-09.
The rises were so steep that it priced most middle income buyers out of the market. Property developers are notorious for not allowing prices to drop, regardless of underlying supply and demand. But it’s not clear to analysts they’ll be able to hold out amid Covid-19’s devastation.
Indeed, many developers were already facing headwinds. Non-baning finance companies (NBFCs) IL&FS, Dewan Housing Finance Corp and Altico Capital India all defaulted in 2018, prompting banks to pull back loans to non-banking finance companies and housing finance companies. That, in turn, causes a liquidity crunch among developers.
India’s property developers borrow mainly from informal sources and NBFCs due to stricter regulations on bank lending. Real Estate Regulatory Authority rules, meanwhile, have made it tougher for developers to hoodwink buyers.
Homes in most Indian towns are usually constructed by local developers, most of them unlisted and many with political connections. Only a handful of developers have a pan-India presence. All of them will now have Covid-19 incentive to lower prices to clear their stocks.