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March 24, 2020

Covid-19 outbreak to affect residential growth revival in India

India is facing major challenges in its residential sector, which was already struggling ahead of the recent coronavirus crisis. In view of the current lockdown in the country, with some states even imposing curfews, GlobalData has revised down the forecast growth rate for the construction industry in 2020 to 3.4% from an earlier 5.1%.

The construction industry had ended 2019 with a real growth rate of 0.3% year on year in the fourth quarter; the lowest since the second quarter of 2017. This was a result of a slowdown in the economy due to the liquidity crunch that has heavily impacted the economy, particularly construction activity in the residential sector, which suffered a decline in new launches of residential projects across major cities.

Prior to the outbreak of the coronavirus, GlobalData had expected the residential market in India to grow at 3.1% in 2020, an improvement from the 1.2% growth in 2019. However, with the GDP growth rate expected to be affected by the lockdown due to the coronavirus outbreak (S&P has reduced the country’s expected GDP growth rate in 2020 from 5.7% to 5.2% prior to the lockdown in the country), GlobalData expects the housing market to further deteriorate due to the adverse effect of the containment measures on the country’s economy. The residential sector, which had been the main drag on the industry, is now expected to contract by around 1% as the problem due to the liquidity crisis is likely to be further exacerbated by the lockdown due to the virus outbreak.

Even before the lockdown in most of the country from 23 March, workers’ attendance at the project sites had dropped by around 30%, according to the Confederation of Real Estate Developers’ Associations of India (CREDAI), but following the lockdown, construction work has been stopped at almost all sites across the country. As a result, projects will face delays leading to cost escalations and penalties under the Real Estate (Regulation and Development) Act (RERA). Another problem for the residential sector is that the current lockdown is likely to extend till mid-April, and so projects that are at preliminary stages would need to be ramped up quickly before the arrival of monsoon in June, which could otherwise lead to further delays. The smaller construction companies are particularly vulnerable as projects would take longer to finish, thereby escalating any financing issues they may be facing.

Apart from the direct effect from the supply side, the demand side too is likely to affect this sector. Unemployment rates are already quite high (at 7.8% in February 2020 as per data from the Centre for Monitoring Indian Economy), while the lockdown of schools, colleges, gyms, malls and other commercial establishments is likely to further increase the unemployment rate in the short term. The disruption in businesses could result in the close down of thousands of small businesses, which could further worsen the liquidity crisis as the banks’ non-performing assets rises.

In view of these problems, the CREDAI has requested the government to provide relief to the sector through extension in projects completion, as well as suspension of one year on payments to planning authorities and state governments and a one-year moratorium on home loan monthly payments for both home buyers and developers. The CREDAI and other associations are also requesting the state and central governments to provide a minimum wage to all construction workers through the Building and Other Construction Workers Welfare Board (BOCW).

There are downside risks reflecting the uncertainty over the effectiveness of the latest government containment measures. Also, in case the number of infected persons does not start decreasing, the lockdown may be prolonged until the end of April, thereby further worsening the situation, which may lead to a further downward revision in the construction industry growth forecast. Although the government is likely to announce a fiscal package, while the Reserve Bank of India, the country’s central bank, is also expected to lower policy rates in line with other central banks across the region, the loss of jobs amid the economic slowdown will weigh heavily on the already distressed industry.

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