The crisis of this scale has not been seen by anyone living today. The economic hit to some sectors is more like the real estate as compared to the F.M.C.G. sector. In economic stress people spend only on necessities. According to Credit ratings agency Moody’s, it has revised its forecast. As per the agency in 2020-21 the Indian economy will now grow at 2.5% instead of 5.3%. Even in this there’s great disparity between sectors, Real Estate is on the fringe. In India the sector is also smitten by the Giffen Paradox, demand increases when price increases.
However, in these dark clouds there are bright spots too. First of all, the market was already being driven by the end consumers. The investors were not more than 5-10% varying from city to city. Hence it is not that the current sales will dip by huge percentage, effect will be quite less, only for two to three months after the lock-down is lifted. The two most important factors which drive the real estate apart from the sentiments are: i) the rate of interest of the home loans and ii) the agriculture production.
The average housing rate of interest approximately 7.5% now, is the cheapest in the last decade. If we factor in the inflation then the interest amount to be paid by the buyer will even be less. This is a motivator for young and educated professionals who get less influenced by the market negativity as they are always looking for an opportunity to turn their monthly rent in to their EMI. This is a sizeable population, government of India should target them by encouraging the banks to disburse housing loans with less formalities. This will slowly start oiling the currently jarred wheels of the real estate.
The second push will be given by the agriculture sector. The rice production during 2019-20 was a record high at 117.47 million tonnes. This year also saw good produce of wheat as yield was quite high. Ours being an agrarian economy, this will give push to the economy, the results though will be slow. This will lead to spare money being invested in the real estate. Having your own home and stacking gold are the two big weaknesses of Asians, Indians in particular. In some states like Gujarat, Maharashtra stock investments are at par or even more preferred than the above two mentioned investments.
Thirdly the buyers will be encouraged to move towards investing in real estate because of the bad hit taken by the stock market since February 2020. In one go prices crashed to the 2016 prices. Billions of rupees of investors got wiped out. The old saying “that no matter how much slowdown is there you still have your property in hand” has been proved correct. In stock market it is not the case, in some cases you may be left with a bunch of papers only.
In this scenario commercial properties where developers are giving assured rentals with a lock in period are a good option for investors. Even though they are doing so to allure buyers, it’s a win-win situation for both developers and investors. Buyers are getting much better return, 4-5% more than what they will get in fixed deposits. Also, when the scenario improves, which cannot go down further, they will get the appreciation as well.
Considering the prevailing prices particularly in built up residential, it will not see much correction. The buyers have to understand that unlike a decade ago, now the cost of construction is substantially high vis-à-vis the land cost. In B-towns the percentage ratio is almost 30:70, 70% is cost of construction. The cost of construction cannot come down as cement prices, sand and gravel prices, power cost and labor cost can only increase and not decrease. The best developers will do to boost sales and cut losses is by giving better value addition but are not in a position to give substantial discounts. More discounts mean compromising on quality and losing out the race in the long term in this fierce competitive battle.
Whatever the forecasting agencies might be predicting, they are not taking into account the indomitable Indian spirit, the spirit to forget and move ahead. In times like these it’s good to have a short memory rather than mourn for a long time. We bore partition, emergency, four wars and terrorism but forgot and moved on within a span of few months. We are a nation of 1.3 billion and has only 34% urban population, the disparity in education and health sectors make the cities sought after. Real estate in India is and will remain a sunshine sector with little troughs and more crests.