Can India's property sector overcome the pandemic blues and continue its recovery?

Resurgence in Covid-19 infections could disrupt the market but it will be a short-term issue, analysts say

Apartments in New Delhi. Analysts fear a third wave of Covid-19 infections could slow the growth of India's property sector. AFP

A rebound in India's long troubled property market is set to be disrupted by a resurgence of Covid-19 infections, with the wider economic effect expected to take a toll on home-buying trends and financing for developers, analysts say.

However, developers are hopeful that the impact will be short-lived as they remain confident that the industry has the potential to continue on its growth path this year despite the setback.

“The real estate sector witnessed a period of recovery, which is likely to be derailed by the current pandemic wave,” says Ajay Sharma, managing director of valuation services at property consultancy Colliers India.

India's property sector is the second-largest employer after agriculture and is expected to grow to $1 trillion by 2030, from $200 billion in 2021, according to the India Brand Equity Foundation.

However, the market, which accounts for about 6 per cent of the country's gross domestic product, has been through a challenging past decade.

For years, the sector struggled with high interest rates, which made home loans more expensive and deterred borrowers. This was exacerbated by a crisis that hit the non-banking financial sector after a big lender defaulted in 2018, leading to a cash crunch for the property industry that pushed a number of developers out of business.

The sector was initially negatively affected by the pandemic and the government's strict lockdown restrictions. But it made a strong rebound last year as Indians – including those not resident in the country – prioritised home ownership. Interest rates were cut to record lows as policymakers tried to cushion the blow of the economic fallout.

“The Covid pandemic played a catalyst role in fuelling the demand for housing, leading to high sales velocity,” says Niranjan Hiranandani, vice chairperson of industry body Naredco and managing director of property developer Hiranandani Group.

The number of properties sold across the country in the second half of 2021 stood at 133,487, the highest half-yearly figure since 2016, according consultancy Knight Frank.

“The real estate sector witnessed a paradigm shift in the attitude of end users for residential properties … who, perhaps due to the uncertainty caused by the pandemic, started gravitating towards the security of home ownership,” says Shishir Baijal, chairman and managing director at Knight Frank India.

Sales were further boosted by measures taken by state governments to support the industry, including a reduction in stamp duty in Maharashtra, of which Mumbai is the capital.

But with India's third wave of infections this year, driven by the Omicron variant, the situation has cast a shadow over the property market. On Saturday, the country reported 268,000 new daily cases in a 24-hour period, the highest figures since its deadly second wave that peaked in May last year, according to figures from India's health ministry.

“I do agree that in the short term, we will have some road bumps now because of Omicron and, later, there will be some amount of financing-related concerns,” says Abhijeet Pai, co-founder of Gruhas Proptech, an investment company.

“But we are a country of 1.3 billion people and a lot of people are still buying their first or second homes. Omicron is a temporary glitch.”

The momentum in the property sector will continue this year and Omicron will have “a muted impact on economic activities”, Mr Hiranandani says.

However, the resurgence has already prompted economists to lower their economic growth forecasts for India.

Japanese investment bank Nomura cut its GDP projection for India for the first quarter to 3.2 per cent, from 5.2 per cent, but says it does not expect the impact to be sustained for long.

“We expect higher caseloads but assume a shorter duration for the third wave, which should mean economic damage is contained within the first quarter,” says Sonal Varma, Nomura's managing director and India chief economist.

Still, it is too early to predict the kind of effect the spread of the variant may have on the property sector, some analysts say.

“It remains to be seen to what extent, if any, the new Covid-19 variant Omicron [affects] real estate activity,” says Anuj Puri, chairman of Anarock Group, a Mumbai-based consultancy. “The housing sector's prospects generally look upbeat in 2022.”

However, Mr Puri says that “the sentiment revival in residential real estate during the worst parts of the first and second waves hinged heavily on policy support”, which included interest rate cuts, stamp duty reductions and tax benefits on cheaper housing.

This means that homebuyers and the industry will be looking for more support this year from the government, he says.

With Prime Minister Narendra Modi's government's annual budget due to be presented on February 1, many industry insiders are hopeful that this could deliver more support for the sector.

“For the homebuyers, the government should increase the tax incentives on home loans,” says R K Arora, chairman of property developer Supertech. “Amid the scare of this fast spreading Omicron, any additional fiscal incentive to first-time homebuyers will go a long way in further boosting the demand, which has started looking up.”

He also wants New Delhi to take steps to ease the funding issue in the sector, which is a continuing challenge affecting smaller developers in particular.

“The recent debt crisis in some of the large non-banking financial companies has hurt the real estate sector, which was already grappling with a liquidity crunch,” says Mr Arora.

Apart from the rapid spread of Omicron, there are other factors that could hamper the property sector this year.

“Now, the critical questions are whether housing prices and interest rates will start rising in the next year and if that will result in the fading out of the housing growth momentum,” says Rajani Sinha, chief economist and national director of research at Knight Frank India.

The Reserve Bank of India is widely expected to start raising interest rates this year to control rising inflation, which would make home loans more expensive and increase the cost of finance for developers.

Meanwhile, house prices in India have stabilised over the past few months, after having declined in the past few years, Ms Sinha says.

However, increasing raw material costs and land and labour expenses are expected to lead to an increase in house prices this year, developers say.

“As far as prices are concerned, basic land cost is now higher, besides statutory and material costs going up,” says Christina Roach, director at Bengaluru-based developer RBD Shelters. “The increase in construction costs will result in prices going up.”

One of the main hurdles that builders are facing is securing labour after many workers fled India's cities and went back to their hometowns when the initial nationwide pandemic lockdown was enforced in 2020. Many did not return.

“The pandemic has posed a number of challenges but one of the biggest ones has been on-time project delivery, which has primarily come about due to unavailability of labour workforce,” Ms Roach says.

She remains optimistic on the outlook for 2022 and expects the country to register “strong demand for high-quality development at the right prices”.

“There is an increase in the appetite of the buyers to own a home rather than stay on rent,” says Ms Roach.

Sarthak Seth, chief marketing officer at Tata Realty and Infrastructure, says “prices are likely to go up as the cost of raw materials is also spiking, resulting in a price revision of several under-construction projects”.

But despite the challenges and the near-term threat of Omicron, he is confident that India's property sector has finally turned a corner, which he believes has been aided by the pandemic as people seek larger properties due to the work-from-home trend.

“We at Tata Housing achieved 120 per cent of our targeted revenue in the financial year April 2020 to March 2021 and expect to maintain the same momentum in 2022,” says Mr Seth.

“The demand for larger space, more rooms, open spaces and green areas is on the rise, which is likely to drive the sector this year, too.”