Impacts of COVID-19 on REAL ESTATE

COVID-19 has brought the Real Estate Industry to a logjam Position. Impact of COVID-19 on economy has pushed sentiments to its lowest level. And now recovery curve of the Lockdown will depend upon the Fiscal Stimulus rolled out by the Government.

Let’s Imagine a situation where 3 years old law tries to fix its position in the Judicial System and people as well and all of sudden a Virus crosses its way only to prevent it from doing so. Yes, it is Real Estate (Regulation and Development) Act, 2017. The Act came into force in the year 2017 and till the beginning of 2020 lacuna of Judgments been passed improving relations and installing transparency between Developers/Builders and Buyers with speedy disposal of Complaints as well as Appeals.

Coronavirus caused site visit to almost non-existent, and the Business world is scaling down their workforce which will force many prospective buyers to wait for clarity on their job security before making a final decision on the property purchase. Project completion deadlines have also been extended which has pushed completion further this will affect the buyers/purchasers who already invested in the project and waiting for their turn to get possession in the near future. It may also happen that Purchaser loses interest in their dream house. Due to constructions halts and labor shortage, the Residential Sectors which already had concerns of weak demand will find it difficult to launch new projects and complete the ongoing ones.

A health emergency that has force-launched the biggest ever “Work from home” experiment globally and this practice will replace office spaces in the future. Occupancy level in Office spaces will decline in the near term as people are adopting remote working also social distancing will make it difficult for Employers to bring all employees under one roof. Coronavirus has resulted in the closure of malls, retail outlets, and entertainment venues. This will put future Commercial Real Estate on hold. Even after the withdrawal of lockdown public will take time to regain confidence in entering any public places like malls or entertainment venues. Rules of social distancing will also play a big part in it.

“The impact of Coronavirus has been unthinkable in its scope, investors are expected to remain in wait and watch mode, with caution and risk aversion is expected to drive the dominant behavior of institutional Real Estate investors over the next few quarters”, said Ramesh Nair, CEO and Country Head, JLL India.

In this crisis Builders will pin their hopes on Government support to shed their unsold stock. Given the expected impact of the COVID-19 outbreak on the economy, Builders are urging the Authorities to use around Rs. 1 Lakh Crore collected by Authorities from Builder for the Building and Other Construction Workers’ Welfare (BOCW) cess fund to provide for loss of wages and healthcare benefits to construction workers. Cases of Insolvency of Builders might increase as the liquidity situation worsens.

The Builders will feel the most pressure as there will be no or less source of income. In this scenario, a Developer offering a 20 percent discount would also have its own set of challenges. The buyer pool may shrink going forward and discounts alone may not do the trick. Deferred payment plans without subvention may become popular. Builders will try to sell their unsold stock even at the Break-even point (BEP).

In the backdrop of on-going construction work getting impacted, given the unwarranted and an unusual event, the Government has already launched support measures by allowing the Force Majeure clause to skip penalties over project delays. “Force Majeure” under Section 6 of the Real Estate (Regulation and Development) Act which provides for an extension of projects registration granted to promoters in case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the Real Estate Project.

COVID-19 may also, overburden the task of Authorities put up to solve disputes between Developers and Purchasers. As it may get flooded with Complaints from Purchaser’s for withdrawal from the project. Authorities on the other hand have to apply Case management techniques and Time management techniques as due to social distancing it cannot take risk of court flooding. There will be limited matters per day with limited hours, even lawyers have to cut short their arguments to save time. Authority will expect Lawyers as well as Litigants to accept these changes Co-operate with it. This will sum up the mood of buyers. More than paying extra bucks, buyers will prefer to avoid project execution risks in this situation.

Post lockdown, the biggest challenge for the Real Estate sector would be restarting the construction work because large numbers of migrant laborers’ have gone back to their hometown. The Labourer may opt for agricultural activity as monsoon has started and may take time to come back.

"This article is authored by Advocate Ms. Hima Khuman . You can reach out to her at himakhuman@gmail.com."