COVID – 19: EFFECT ON REAL ESTATE SECTOR

The widespread pandemic of Novel Coronavirus / Covid-19 all over the world has brought about the imposition of many restrictions by the Central Government as well as the respective State Governments, whereby a country-wide lockdown has been ordered, which has entailed shutting down of all non-essential services (Services that do not form a part of medical devices, manufacture and transportation of the same, etc.). The complete nationwide lockdown inter alia, the partial or complete imposition of Section 144 in various states has had the cascading effect on migrant labourers, as the same led to them returning to their home states. The sector was further besieged with the problems of financial instability leading to salaries/daily wages not being paid on time as well as goods not being transported across borders, which has resultantly all but brought about the entire real-estate sector to a grinding halt. Moreover, indirect events like shutting down of cement and raw material factories, will further impact the capability of real-estate developers in coping with the current unforeseen situation.

It is relevant to mention that a global shutdown in industry-centralized countries like China and India has led to the collapse of financial markets and economies. In view of such an enormous shock to the global economy, the consequences on the Indian real-estate markets have become far too real. Some of the consequences have been reproduced herein-below:

• A significant investment in Indian real estate has come from Singapore, Hong Kong and China in the year 2019. The United Nations (UN) is predicting that India is at risk of facing a substantial immediate trade loss. Even though both Indian and Chinese economies would not go into a recession as the World economy would.
• Commercial real estate market will be impacted more as it is a slow mover. If Coronavirus keeps impacting the economic supply chains for longer terms than expected, it is a possibility that commercial investment decisions may stray from real estate.
• A flight of capital can be expected as the investors would tilt towards a more stable bond market for investment.

While the residential real estate sector which was already struggling to overcome the past turbulence of policy reforms, structural changes and the liquidity crisis, it is likely to see increased cash flow gaps and liquidity pressure in the coming time, as new sales and residential demands could take a further hit on account of the economic fallout from the Covid-19 pandemic. The same is because many individuals who may have been looking to invest in real estate might re-calculate their investments due to decreasing pay, lack of jobs, retrenchments and etc. which are bound to increase owing to Covid-19. Therefore, it would be a fair assessment to state that the housing sectors would witness a substantial reduction in new launches and a substantial drop in demand. Furthermore, due to the immediate  slowdown in economies across the globe the existing demand for commercial real estate would also get curtailed.

Keeping in mind the genuine crisis that the industry faces a statement was released by the Confederation of Real Estate Developers Association of India (CREDAI) wherein the following policy relief was immediately sought from the Ministry of Housing and Urban Affairs:

1. Inclusion of Covid-19 as a force majeure condition under Section 6 of the RERA.
2. Extension of registration period by at least One (1) year.
3. Requirement of additional funds on the same terms as existing loans without additional collateral from financial institutions to meet the increased costs.
4. Loans by real estate developers should not be classified as NPA in case of default on interest or principal repayment.
5. Interest and principal repayments falling due over the next three months in case of real estate projects be put off and recovered over the next nine months.

The CREDAI has brought forth the proposal of addition of Covid-19 as a force majeure condition in light of the country-wide lockdown which has led to nearly no economic activity and necessitated Work From Home arrangement in the private sector. The pandemic has further lead to the complete shut-down of public and private transport except for those dealing in performance essential services. This along with various governmental directives/orders/advisories (ANNEXURE-A) has therefore lead to the shutting down of manufacturing units and project sites.

In many states, migrant workers who form a major chunk of the workforce in construction related work i.e. the informal sector, have left the major cities where the majority of construction activity takes place and gone back to their villages in rural India. In view of severe labour shortage and government directives as mentioned above all the construction work has come to a halt. Therefore, Covid-19 has been requested to be added as one of the extrinsic factors which may inhibit developers from completing their projects within the stipulated time lines as provided in their licenses/registration under RERA.

It would be amiss to not mention the immediate policy actions initiated by the Government and relevant Authorities which have brought about some relief in light of the subject pandemic:

• The Ministry of Corporate Affairs vide its Notification dated March 24, 2020 has increased the limit of default from Rs. 1 lakh to Rs. 1 crore as specified under Section 4 of the Insolvency and Bankruptcy Code, 2016.
• Reserve Bank of India has allowed Banks to declare a three-month moratorium on all term loans outstanding as on March 1, 2020, as well as on working capital facilities.
• The Maharashtra Real Estate Regulatory Authority by its Order No.:- 13 / 2020 dated April 02, 2020 has revised Project Registration Validity and Extended Timeline for Statutory Compliances, in view of Covid 19 Pandemic.
  • For all registered projects where completion date, revised completion date or extended completion date expires on or after 15th March 2020, theperiod of validity for registration of such projects has been extended by three months and project registration certificates with revised timelines for such projects would be issues subsequently.
  • Further, the time limits of all statutory compliances in accordance with RERA due in March, April and May have been extended to 30th June 2020.

While the Maharashtra RERA has proactively extended timelines, the RERA Authorities in other states are yet to formulate any revisions or policy decisions with respect to the impact of Covid-19 on the real-estate industry.

According to a report released by Anarock Group on the impact of Covid-19 on the Indian Real Estate Sector, well-funded projects could take several months over and above scheduled deadlines to be completed, while other projects could be delayed by two years. It has also been reported that a total 15.62 lakh under-construction homes could be affected by the lockdown, with 57 percent of these units in the National Capital Region and Mumbai Metropolitan Region.

Moreover, another industry body, National Association of Real Estate Developers Council (NAREDCO) has urged the government to allow construction work at project sites subject to adherence of safety measures and lift the lockdown on the same. The said request has been made to minimize losses and for finishing urgent maintenance and facilities like rain water harvesting pits, storm drains, etc. before the onset of the monsoon.

While the residential and commercial real estate sector was still overcoming certain major policy decisions and legislations, the onset and spread of Covid-19 is set to heavily impact and adversely affect real estate developers in its wake. The Real Estate Sector contributes to 13% of the national GDP, is the second largest employer in the country and has a direct effect on around 250 allied industries. Hence, it is of utmost urgency that the Government relaxes certain regulations to help the builders fulfil their commitments.

ANNEXURE-A

LIST OF STATES AND UNION TERRITORIES AND OFFICIAL CORRESPONDENCE/ PRESS RELEASE/ ORDERS/ NOTIFICATIONS PASSED BY EACH STATE/UT