The Covid-19 pandemic has been hard on the Indian economy. A prolonged period of subdued demand, low production, de-growth and uncertainty has impacted most of the sectors in the Indian economy. Real estate and infrastructure have been no exceptions. The current quarter (Q2 of the 2020-21 fiscal) is absolutely crucial for the fate of these sectors.
The impact of the Covid-19 pandemic has been immense on the Indian real estate sector. According to industry insiders, the pandemic is being termed as the third ‘Black Swan’ event in the last five years – the first two being demonetisation and the implementation of the Real Estate (Regulation and Development) Act, 2016.
During the lockdown period, property transactions dipped, leading to a host of problems for real estate players. The interdependence of supply chains, migration of labourers, cost overruns and liquidity constraints were some of the factors that added to the woes of the sector.
But is everything lost for the sector? Maybe not. With the Unlock 3.0 implemented by the government, there may be a silver lining. Before the pandemic, a large section of real estate players was expecting renewed consumer confidence and demand for affordable housing. They had their recovery expectations pegged on 2020 and beyond. Apart from the big organised players, quite a number of players were staring at financial distress, lack of execution capability, oversupply of inventory, GST complications, excessive land banking, lack of understanding of the demand supply dynamics, unjustified product pricing and the absence of social and physical infrastructure in emerging markets and hoped that 2020 will be a fresh start. Instead, the pandemic changed things for the worse.
As things stand, with the home sector slowing down substantially, cases of non-performing assets (NPA) are set to rise and as per recent studies, 30% of real estate players will look for an exit. The sector may well expect a second wave of consolidation. The liquidity shortage for developers in tier 2 and 3 cities will further hasten the process. Net disbursals by Non-Banking Financial Companies (NBFCs) to real estate developers have declined, especially for assets that are in non-metro regions of India. With small and mid-sized developers looking to liquidate assets to manage debts, there will be a host of acquisition opportunities for large developers.
The superior technological investment of the big real estate giants will also ensure their survival and growth through these difficult times. This process of consolidation will augment well for the real estate sector as big players with expanded portfolios will be better placed to cater to the emerging demand with their established credibility and brand value. Additionally, long stranded incomplete projects of smaller developers maybe taken over by bigger players and completed through an infusion of liquidity. This may boost the supply. According to market insiders, big real estate developers must however look beyond luxury offerings and foray into the affordable segment.
The infrastructure sector has also been severely impacted during the pandemic. With severe labour shortages and subdued corporate earnings and investment, the Indian infrastructure sector remains handicapped with several issues.
Srei Infrastructure Finance Limited, a prominent private infrastructure financing company has already started reducing its involvement in the infrastructure sector due to increased risks in the sector and instead will focus on equipment finance.
Hemant Kanoria, Chairman, Srei Infrastructure Finance Limited, recently told an English weekly, “We were witnessing a silent recovery in demand for equipment before the outbreak of Covid-19. We are confident that when the situation becomes normal, the demand for equipment will pick up with the awarding of new EPC contracts.”
Speaking on the status of the infrastructure sector and private involvement, Kanoria stated, “There is no doubt that India needs quality infrastructure and the government is trying its best to drive significant investments in creating infrastructure. However, in the current situation the private investors are in a wait and watch mode.”
According to him, the Reserve Bank of India may look into one-time restructuring of loans based on the cash flow without which there could be large non-performing loans (NPLs) in the infrastructure sector. Going forward, the government must take a proactive role to retain the level of private involvement in the infrastructure sector by looking to create an environment that is suitable for private players.