This article is written by Vanya Verma pursuing B.B.A.LL.B (Hons.) from Alliance University, Bengaluru. This article talks about how COVID-19 has impacted the real estate sector and guidelines given by the government, RERA and other authorities in lieu of this COVID-19 pandemic.
The COVID-19/Novel Coronavirus pandemic around the globe has resulted in imposing too many restrictions by the Central Government and State Government. The order to impose nationwide lockdown has resulted in shutting down all non-essential services. The imposition of Section 144, CrPC by various States and lockdown had a cascading effect on many people like migrant labour who were left with no other option but to return to their homes due to non-availability of work and thus left with no money for food and other essential items. Other problems that arose due to this pandemic were economic instability that led to cutting down of salaries and wages of the workers and non-transportation of goods across borders and in addition to all this shutting down of raw material and cement factories that have brought the real-estate sector to a grinding halt.
Impact of COVID-19 on real estate
It is expected by a rating agency, ICRA (Investment Information and Credit Rating Agency), that residential developers will witness a decline in their net cash flow on account of this COVID-19 pandemic. ICRA’s Associate head and Assistant Vice President, Mahi stated that “A prolonged outbreak may result in recessionary dynamics which would have a deeper impact on project cash flows and execution abilities. Such an impact combined with the ongoing credit compression and prevailing inventory overhang in the sector, would likely result in significant credit pressures going forward”. Additionally, he said that “Demand risks for the housing sector are likely to enhance, given the rising apprehensions on overall economic growth and contagion related fears directing to reduced walk-ins, thus resulting in some reduction in new sales and associated collections. Committed collections receivable from the already booked sales may also get affected to some extent, given that mile-stone based payments may get deferred and some buyers may delay payments on account of economic uncertainties arising from the imminent possibility of job cuts and pay cuts as the crisis extends. Developer ability to remotely issue and follow up on demand notices will also have a significant bearing on collection efficiency levels”.
The RERA (Real Estate Regulatory Authority) guidelines have rendered an extension of one year in the execution timelines of the projects if the event is beyond the control of the promoter. Therefore, reducing the regulatory risk in the disruption of short-term projects.
Confederation of Real Estate Developers Association of India (CREDAI) released a statement in consideration to the crisis that industries are facing wherein the Ministry of Housing and Urban Affairs immediately sought the following policy relief:
- To extend the registration period by at least one year.
- The principal repayment and interest that are falling outstanding over the duration of the next three months should be put off in real estate projects and instead of three months should be recovered in the next nine months.
- The loans taken by the real estate developers should not be declared as Non-performing Assets (NPA) if they default on payment of principal amount and interest.
- The requirement of additional funds to be met on the same terms to meet the increase in costs from financial institutions without any additional collateral.
CREDAI in consideration to nationwide lockdown has proposed to include COVID-19 as a force majeure under Section 6 of The Real Estate (Regulation and Development) Act, 2016 as it has led to no economic activity and implemented in the private sector the facility to work from home. Except for the ones dealing in essential service, complete shutdown has been ordered in private and public transport as well as shutting down of project sites and manufacturing units.
The migrant workers that work in the organisation have left for their homes from the big cities where most of the construction activities take place. Therefore, due to the acute labour shortage and the guidelines (mentioned above) by the government, all the construction activities have come to a halt. Thus, it has been requested to include COVID-19 as one of the intrinsic factors which might hinder in the completion of construction work within the stipulated time as the developers have provided in their registration or licenses under the RERA sector.
The global lockdown has collapsed the economy and financial markets of industry-based countries like India and China. The Chinese economy has shrunk to 6.8% because of this coronavirus crisis. That is not a good sign as various countries depend upon the raw materials from China.
China has come up with a Yuan 800 billion special refinancing. Italy, in order to support the economy, has come up with emergency purchase programs. A 120 days moratorium has been provided by the US government to the federally subsidised property that is backed by a mortgage loan. Government has released $500 billion for liquidity, took a stance of ‘whatever it takes’ and is even prepared to lend up to zero rates.
The government of the USA has imposed a 60-days ban upon the immigrants who come to the country seeking to work and live in the country, depending upon the situation, the ban can be extended.
Few European countries have either provided the citizens with temporary mortgage relief or curtailed evictions. Further, mortgage holidays have been offered to the commercial real estate owners.
The GDP of 170 countries is declining as recently projected by the IMF (International Monetary Fund) due to the coronavirus crisis. It has been further predicted that the ill-effects of this crisis will continue even in the next year, that is 2021 and further accelerate the downturn.
The IMF recently stated that despite the coronavirus crisis, India in 2020 will still remain the ‘fastest-growing major economy’.
The global shutdown that has collapsed the economy and financial market has affected the industry-centralized countries like India and China. The consequence of this collapse had a vast impact on the Indian real estate markets.
In 2019, significant investment came from China, Hong Kong, Singapore in the Indian real estate sector. It has been predicted by the United Nations (UN) that India might face substantial immediate trade loss. Even when the world economy will go under recession but not Indian and Chinese economy.
The impact of this crisis will be more on the slow mover commercial real estate market. There is a possibility that the decisions of commercial investment might drift from the real estate if this coronavirus crisis keeps on impacting the economic supply chain than an expected longer duration, as the investors will also like to invest in a more stable market.
While the residential real estate that has already not been able to cope up with the past turbulence caused by the liquidity crisis, policy reforms and structural changes, the coronavirus crisis in the coming days will further increase the liquidity pressure and gaps in increased cash flow, the reason behind this will be fall in residential demands and new sales due to the investment that many people might have thought of investing in real estate will reconsider it on account of a decrease in pay, retrenchment and many people have lost their jobs and if this crisis keeps on continuing for a long time then these will keep on increasing. Thus, housing sectors might witness a substantial drop in demand and reduction in existing demand in commercial real estate due to downfall in the economy.
Immediate policy action by the government
The government and various other relevant authorities to provide relief in coronavirus crisis have come up with the following policy actions:
- The Reserve Bank of India (RBI) has declared a moratorium of three months on all working capital facilities and loans outstanding as on 1st March, 2020.
- The Ministry of Corporate Affairs in its notification released on 24 March, 2020 has increased the default limit to Rs. 1Crore from Rs.1 lakh as given under Section 4 of Insolvency and Bankruptcy Code, 2016.
- The Maharashtra Real Estate Regulatory Authority on 2 April, 2020 has extended the timeline for the statutory compliances and revised the Project Registration Validity by its order No.13/2020.
- Completion date, revised completion date or extended completion date for all the registered projects expiring on or after 15th March 2020, the validity period has been extended by a duration of three months for registration of these projects and revised timeline for certificates of project completion will be subsequently issued.
- In accordance with RERA, the time limits of all statutory compliances that are due in March, April and May have been extended till 30th June 2020. The RERA authorities of Maharashtra have extended timelines and other states are yet to formulate policy decisions due to the impact of COVID-19 on the real-estate industry.
Anarock Group released a report on the impact of COVID-19 on the Indian Real Estate Sector. According to this report, well-funded projects can take another several months from scheduled deadlines to complete their projects. The report also stated that lockdown will affect 15.62 lakh under-construction homes out of which 57% units are in the metropolitan region of Mumbai and National Capital Region.
The National Association of Real Estate Developers Council (NAREDCO) requested the government to permit the construction at the project sites while adhering to the safety measures and lift the lockdown on these projects. The request was made to minimise losses and complete the maintenance and facilities that are urgent like storm drains, rainwater harvesting pits etc. before the arrival of monsoon.
Measures taken by other countries to provide relief to the real estate sector
The measures taken by various countries to provide relief to the real estate sector due to this coronavirus outbreak are as follows:
- The USA: The USA government is pondering for a special financial package to help the construction workers and to provide relief to the projects that are federally-funded, as most of the construction activities have been ceased because the activities like construction and building have been categorised as non-essential services in the country.
- Australia: The Australian Government in order to ensure the flow of capital and availability of liquidity, has lowered the benchmark repo rate. To help the slowing down economy, the country’s government has generated a special funding facility to the amount of AUD 90 billion.
- France: In France, the government has approved to consider the coronavirus pandemic as force-majeure. The government also stated that there will be no imposition of penalties on the developers and contractors in case of delay due to this outbreak.
- Canada: The Canadian government will be contributing $27 billion to support the Canadian workers that include construction labourers. Ontario and other states have also included building and construction in the list of essential services. A detailed safety guideline has been released by the Construction Association of Canada amid this pandemic for the construction workers.
- Singapore: Special laws have been made by the Singapore government to help the labourers and construction industry, who have been affected by the coronavirus pandemic. From 1st April 2020, the construction companies have been allowed a refund on account of Man Year Entitlement (MYE). Further, if foreign construction workers face hardships with the current employer they can change the employer midway.
- Germany: The government of Germany has released a welfare package of Euro 400 billion, focussing mainly upon the blue-collar workers. It was also vowed that the government will take over the employees’ wages and pay compensation for the working hours that have been lost due to the COVID-19 crisis.
- The United Arab Emirates (UAE): UAE has released a special package of $27 billion for the construction industry and small and medium enterprises to stimulate the economy that has been affected due to COVID-19 crisis.
The United Nations (UN) and The International Monetary Fund (IMF) have prompted that the developed countries should put the debt payment on hold for some time from the poorest countries so that they can focus on the fight against the crisis due to COVID-19.
The World Bank has also come forward at the time of the coronavirus crisis and has vowed to give a package of $14 billion for the countries to fight against this situation.
The spread of COVID-19 and the crisis that arose due to this pandemic will have an adverse effect on the real estate and its developers. The contribution to national GDP by the real estate sector is 13%. The real estate sector accounts to the second-largest employer in the country and has a direct influence on 250 allied industries. Therefore, it becomes very important that the government should make relaxation on certain regulations to help the builders to fulfil their responsibilities and obligations.
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