Real Estate Blues: Impact of COVID-19 on the Real Estate Industry
Ms. Upama Sen
The COVID-19 has brought in paradigm changes in our lives and has forced the world to function differently. With the onset of the pandemic and the resultant closing of international boundaries, indefinite travel bans, etc., the need for a safe living space has emerged as a fundamental necessity. With the implementation of the nation-wide lockdown, the country came to a standstill, resulting in loss of jobs, salary-cuts, etc. As migrants chose to return to their hometowns, the country has witnessed major reverse migration over the past few months. With virtual being the new normal and organizations choosing to function remotely, more people are vacating their city homes. All these have skewed the real estate ecosystem and revival seems a distant dream.
Real Estate, Economy & Urbanization
The real estate industry has played an integral role in shaping the economy, particularly in developing countries like India. It is one of the most globally recognized sectors and comprises four sub-sectors, namely residential, commercial, industrial, and land. Its growth is well complemented by the growth in the business and investment, demand for commercial space and urban housing. Being labor-intensive, real estate construction plays a key role in generating employment. With increasing urbanization in Indian cities, the real estate sector has boomed in the past decades.
The urban population in India has rapidly grown over the past few decades and stands at 34.47% in 2019. Several pull factors such as employment opportunities, high wages, etc have acted as a catalyst in the migration of people to urban areas from all over the country. Over the last few decades, real estate has emerged as a key sector owing to the growing service-based industries, rising job prospects and income, an increase of nuclear families, easy availability of finance, etc. Due to the long term asset value of real estate, owning personal property is highly revered, India is no exception.
A pedestrian walks past residential buildings under construction in Uttar Pradesh, India.
Photographer: Anindito Mukherjee/Bloomber
Effect of Pandemic
For India, the double whammy of rising cases and declining GDP has been catastrophic. All sectors of the economy have been adversely hit, particularly the real estate industry. Data released by the National Statistical Office (NSO) states that except for agriculture, all key sectors have witnessed major contractions. The disruption of supply chains, unavailability of workforce, cost overruns, and liquidity limitations have emerged as some of the big challenges in the real estate business. The construction industry heavily depends on Chinese imports for raw materials, construction equipment, etc. Hence, with the implementation of a nationwide lockdown, real estate construction came to a grinding halt. Some experts believe that even amidst this crisis, there is an opportunity open to Indian industries to reinforce the ‘Make in India’ concept and decrease dependency on foreign imports. Also, the Indian government is encouraging steel manufacturers to enhance their production capacity to capture a larger market share.
Real Estate Sentiment
The last couple of years had already been turbulent for the Indian real estate market owing to demonetization, followed by the implementation of reforms like demonetization, Real Estate Regulatory Authority (RERA) and Goods and Services Tax (GST). All these had deterred developers from launching new projects. However, the year 2018 saw the market steadily reviving, only to be faced with the catastrophe of the pandemic. As the global and Indian economy has slowed down, consumer sentiments have taken a massive hit. On account of the COVID-19 pandemic, the Real Estate Sentiment score has dropped to its lowest levels at 22 during the April-June quarter of 2020. India has slipped to 54th position against 47th in July-September quarter 2019 in the Knight Frank's Global House Price Index Q3 2020.
Change in Consumer Behavior
The current crisis has caused major shifts in consumer preference. The fate of commercial real estate, which has always been considered a more lucrative and reliable investment than residential property looks dull with the work-from-home culture sweeping across the corporate sector. With more people working remotely, many companies are surrendering a part of their rented office space. And with the flexibility to work from home many employees have opted to move back to their hometowns. With job slacks and pay cuts owing to the economic meltdown, the working class is being forced to return to their native places. The COVID-19 pandemic triggered a reverse migration in the country, where migrants from urban areas move back to the rural area. This has been the second-largest mass migration in the recorded history of India, after the Partition. Many people are opting to move out of city centers, as proximity to the workplace no longer remains a constraint for a choice of housing. The work-from-home flexibility has tilted the consumer choice in favor of residential real estate (No Broker). As interest rates have dropped, people have been interested in investing in residential real estate. People are opting to move away from city centers to cheaper and spacious suburban accommodations as travel distance no longer remains a constraint. However, this is much smaller in scale as compared to the mass suburbanization of the US and Europe.
The rental housing sector is a big sector in urban areas, which lacks certain formalizations. Unable to meet rents, tenants have been evicted in many cases. With more people moving back to their natives, the rental housing sector is suffering a major low. This has created a ripple effect in the market. As tenants move out of their rented accommodations, landlords who depended on rents as a source of income are suffering to meet their financial obligations. The crisis highlights the lack of security and affordable housing in most cities.
Source: Quarts India
More than 40 million people migrate to urban areas, in search of better livelihood. These are mostly people who serve the informal economy as daily wage earners, construction workers, domestic help, street vendors, etc. The primary cause of migration has mostly been better economic opportunities. And as the world witnesses an economic meltdown, the cities no longer remain hotspots of attractions and opportunities. Rather, it has become a migrant’s nightmare to survive with no money and job security. With the implementation of nation-wide lockdowns, the country saw the phenomenon of reverse-migration. This has led to the unavailability of construction workers in urban areas that has disabled resumption of work, thus worsening the scenario.
The Coronavirus has adversely impacted real-estate sales. As the future remains blurry, people are skeptical about making big investments. New launches have been put at bay. Although the real estate industry looks less promising due to the current pandemic, according to a survey, 54% of people believe that this is the best time to invest in property as property prices have remained constant for some time now, home loan interest rates are low, and many developers are offering great discounts to offload their piled-up inventory and enhance cash flows. More than 10 months into the pandemic, the market is slowly opening up with genuine buyers and resumption of construction, but at a much slower pace. Job uncertainty and liquidity crunch are cited as the major hindrances in investing in real estate. The current situation has brought consumers closer to realizing the importance of owning a home. As the national GDP dives into negative figures, the basic needs of ‘Roti, Kapda, Makaan’ is what the average Indian is trying to secure.
Upama is an Architect and Planner by profession. She is a graduate of the Indian Institute of Technology Kharagpur. Her research interest includes public spaces, liveability and inclusive development. She believes in working towards a sustainable and better tomorrow. When not working, she is a visual arts enthusiast. She likes to explore different places and cultures.