Real Estate

Real Estate: The challenge after COVID-19

Updated : April 23, 2020 07:49 PM IST

Various analysts have forecasted up to thirty percent contraction in demand for new homes this year.

Market contractions are not equitably distributed among the market participants.

At a recent panel discussion, the moderator’s opening question was whether business leaders should now consider a world after corona, or a world with corona? While that is an interesting wordplay, it is of course more than just a play of words. The jury is still out on how extended the defiant ‘curves’ will be. Even so, it is increasingly clear that the disease’s shadow, or after-glow for those with the foresight to look for it, will be long.

Like other sectors, India’s residential real estate business too will be shaken from its foundations. The impact is likely to be both severe and protracted. Developers will need to navigate four challenges all at once — demand being deferred, construction getting impeded, liquidity drying up, and shifting customer preferences.

Various analysts have forecasted up to thirty percent contraction in demand for new homes this year. That is indeed a plausible scenario and will have market-share-seekers worried. It has been seen time and again, though, that market contractions are not equitably distributed among the market participants. Stronger brands and better products, incorrectly viewed interchangeably, could, in fact, stand to gain.

A contrarian view on demand could be that the lockdown experience will prompt fence-sitters to finally commit to buying the better home they’ve been considering for a while now. Such a groundswell of nascent purchase intent will, of course, take a few quarters to translate into sales. Those who subscribe to this view would wisely envision a deferral of demand rather than a contraction of demand and set themselves up for the probable rebound.

A key sector economically, socially

The construction sector in India employs in excess of fifty million people. A large majority of them are unskilled. As a major employer, the sector is therefore not just economically significant but also socially important as the government seeks to kick-start the economy and restore livelihoods.

However, this construction labour tends to migrate seasonally from villages to the large cities. Will they feel safe doing so after the scarring experience of COVID-19? No doubt, both governments and private companies will need to incentivise them financially through higher wages. This, in turn, will tilt the balance for construction contractors in favour of increased mechanisation. Not every contractor or developer is equipped to embrace this modernisation at the same pace.

Even for sold apartments, customers are wanting to delay subsequent payments for their under-construction apartments because of their own financial uncertainty. If a project performs well at launch, its entire working capital should get funded by customer advances in the normal course. Therefore, demand deferral and construction delays, when conflated with this customer anxiety and tight-fistedness, presents a dire scenario for the liquidity of developers. They will perforce need to look for other means to fund working capital, which will only be possible for those with stronger balance sheets.

A challenging time for marketers

Finally, and perhaps most important in the long term, what homebuyers look for and how they choose to buy will both change irreversibly. Crowded launch events where developers seek to create a Fear of Missing Out (FOMO) will no longer be possible, forcing marketers to reinvent a time-tested and hackneyed formula.

Even more of the product research will happen online, fuelling the prospects for comparison shopping portals. To defend their turf, developers will be forced to step beyond their limiting lead-generation lens of yore to build end-to-end digital sales capabilities. Buyers will also start placing a premium on features like sustainability, security and convenience in their new homes.

When taken individually, each of the impacts on demand, operations, economics and buying behaviour could derail an otherwise successful developer. Coming together, they will certainly upend the industry itself — a prospect that should send both a chill and a thrill down the spines of industry leaders in equal measure.

-Arvind Subramanian is Chief Executive at Mahindra Happinest. The views are personal.