Almost exactly a year ago at the peak of the COVID-19 crisis, there was outright panic in the Mumbai real estate market. An existential crisis for humanity was being debated. Work from home had triggered the possibility that city-life was becoming redundant and with that the demand for housing. The economic cost of the pandemic was hard to predict but everyone estimated the damage would be substantive.
As the second-wave of COVID-19 pulverizes the financial capital, there is no panic among stakeholders this time – so far. A big reason is that COVID-19, while menacing and taking the lives of many, is not as scary as one had initially anticipated. Secondly the economic impact of COVID-19 has not been as severe. And thirdly – a stamp duty cut by the government spurred strong sales for many developers and generated a level of confidence that was absent previously.
Yet, it will be a brave (or listed) developer who will claim that the sector is on a strong footing. Most of them had been aware that things would soften after March 31, 2021 once the time-bound stamp duty waiver expired. The only point to be debated was the extent to which sales would taper off.
In my last column I had forecast that a crash was unlikely for the real estate sector although a slowdown was imminent. That was prior to the second wave. I still hold on to that view. A big reason for that view is my belief that a greater number of developers have become rational in their expectations. Planning has become better. On the key aspect of pricing in an expensive market like Mumbai, everyone appears to have learnt their lessons. The age of delusional pricing is over. The CASA formula is being adopted and is seeing success – Credible Builder, Aggressive Pricing, Small Apartments & Amenities.
This does not mean the industry can rest easy. The momentum generated between September 2020 and March 2021 was on account of all the stakeholders doing their bit: Builders, government and the lenders. Pent-up demand as well as otherwise future demand got largely crunched into a seven-month window. Cost of ownership for a home buyer had been reduced by 15% in a large number of cases. It was not uncommon to see benefits of 20% also available in select projects. Developers did the heavy lifting but lenders and the government also contributed. Lenders offered attractive schemes to incentivize deal closure. That contribution from lenders is beginning to unravel. With the stamp duty waiver being removed, the government support is over. That means going forward the developer will have to take on an even larger responsibility in attracting customers.
There is a debate on whether prices will fall further with COVID-19 striking again. Expectedly, the consensus among most developers is that prices won’t drop from here but will stagnate at current levels in the medium-term. On this aspect, I agree to a large extent with the industry. In my view prices will not drop meaningfully from here. The majority of developers have thrown every bit of possible cost reduction to the home buyer in the last year. Few developers may still have a small buffer to offer buyers but it will be very limited.
Thus, in the near-future (not immediate future), the market will revert to the sluggish stability that prevailed prior to the pandemic. Unlike the recent past where even sub-par projects gained traction, going forward there will be discrimination in the choice of projects that will thrive. Only select projects will have acceptance while several will struggle.
The scenario could have been stronger if the FSI premium cut was taken to its logical conclusion. That is the sum paid by developers to the government for receiving permission to build a greater area in a project. For too long that expense had gone out of control even though housing demand and prices remained weak. Three months ago, it appeared that the government had realized its contribution when it opted to cut the FSI premium. Unfortunately as clarity emerges on the conditions associated with it, there is a distinct conclusion that the benefits of the premium cut will be for a very limited set of projects and developers. As Nishant Deshmukh of Sugee Group says: “Developers have to be answerable to customers and those that don’t will anyway not survive. But this is the time that government help can really rescue the sector.”
The FSI premium cut is an opportunity wasted. A sector that was finding its feet will soon go back to its limping ways. And a crisis is not far.
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