Existing homebuyers face risks of delay and default as covid-19 hits real estate sector
It will take 30 to 60 days to re-initiate any activity at construction sites even after the lockdown
The covid-19 pandemic has taken a huge toll on the real estate sector with construction activity coming to a grinding halt. Though developers have been allowed to resume construction in a few non-containment districts, the damage is already done. The worst sufferers are, of course, the homebuyers who are waiting for the possession of an under-construction house or are planning to buy a new one. Here are some consequences they should prepare for.
Those who have already bought a house and are waiting to get possession should prepare themselves to face delays and losses.
Pay both EMI and rent: The immediate impact on the existing buyers is project delay. As a result, they will have to postpone their plans to shift into their new houses. It also means paying rent for a few more months and extension of the loan period. “For those awaiting possession of their houses, the wait will become little longer. Resuming construction work at full capacity may take some time as a chunk of daily wage labourers have migrated to their hometowns," said Mani Rangarajan, group chief operating officer of real estate portals Housing.com, Makaan.com and PropTiger.com.
It will take 30-60 days to re-initiate any activity at these sites even after the lockdown, said Ramesh Nair, chief executive officer and country head, JLL India, a real estate consultant firm. “Even when the lockdown gets over, mobilization of labour will take time," Nair said.
Don’t expect a delay penalty: According to Real Estate (Regulation and Development) Act, 2016 (Rera Act), developers are required to pay a penalty for each month of delay in project delivery.
While it’s almost certain that projects will get delayed in this situation, homebuyers are unlikely to get any compensation for the delay. “It will be difficult to expect compensation for delay since a pandemic like covid-19 is an unforeseen incident. Delay compensation comes into play only if there’s an intentional delay from the developer," said Nair.
In many states, such as Maharashtra, Karnataka and Uttar Pradesh, in view of the situation, state real estate authorities have already extended the completion deadlines of under-construction projects.
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.
Higher risk of default: The other big problem is the risk of default by both homebuyers and developers. According to a recent report by Indian Chamber of Commerce (ICC), an industry body, about 65% of homebuyers are expected to default on their instalments linked to under-construction property (read more at bit.ly/2VsqRcd).
Many buyers are expected to default because of pay cuts and job losses. This coupled with low sales and pressure on selling price, will impact developer’s cash flow, which, in turn, may lead to defaults. “Covid-19 has already unleashed the next wave of consolidation within Indian real estate, with financially strong and organized developers are likely to occupy 75-80% market share in the coming years. Many financially weak entities will cease to exist post covid-19 because of the liquidity crunch and lower housing sales amid changing buyer preferences," said Anuj Puri, chairman, ANAROCK Property Consultants Pvt. Ltd. Buyers in under-construction projects, where the developer is not able to maintain liquidity, will have to wait even longer.
Covid-19 will also impact prices as well as supply in the real estate market for new buyers.
Prices may go down: Many experts believe that property prices may go down post covid-19 to boost demand. In a webinar conducted jointly last month by two real estate bodies—the Confederation of Real Estate Developers Association of India (Credai) and National Real Estate Development Council (Naredco)—Deepak Parekh, chairman, HDFC Ltd, advised developers to reduce the prices of properties by as much as 20% to clear the inventory and overcome the situation.
However, other experts believe that there is little scope of price correction. “As such, the scope of further reduction in prices is very remote. If any, it will be confined to luxury segment. There may be some deleveraging by a few developers to improve their cash flows," said Rangarajan.
Developers with high unsold inventory who are facing financial crunch may resort to price cuts. “Price reductions will essentially vary based on the financial stress of the respective developers, and from project to project. Developers whose project/s have done well and are almost sold out will not slash prices, especially if they have the financial strength to wait it out. However, those with ample unsold inventory may reconsider their prices. The percentage of price reductions, if any, will depend on how badly a developer needs to shed inventory," said Puri.
Those who are planning to buy would be in position to take advantage of the situation. “Fence-sitters who had been waiting to buy a property can now negotiate hard and get good bargains," said Puri.
New supply may dip: With financial distress and low demand, developers are unlikely to launch new projects at least for the next few quarters. In other words, you will have less choice. “Over the next couple of quarters, there will be few project launches. The focus of almost all the developers would be on reducing unsold inventory and completing existing projects," said Rangarajan
Nair agreed. “With liquidity pressure and focus to complete existing projects, the number of launches will come down, further creating a supply mismatch in certain micro markets," he said.
In the present scenario, if you are an existing homebuyer, put aside adequate amount of money to pay both rent and EMI. You can evaluate the moratorium offered on EMIs, but remember that it’s a costly option (read bit.ly/3bocHy4). If you are still planning to buy a house, it is advisable to postpone big-ticket purchases till things settle down. But if you think covid-19 will not impact you financially, you may grab the opportunity. However, experts suggest that you should buy real estate only for self-use and not for investment.