Covid-19 Related Relaxations & Method of Handling Defaults - Real Estate

Effect of the Pandemic on Real estate Functioning:

Real Estate is a major sector globally. In India it has seen its ups and is now seeing the downs. Since the last 3 years or so the Real Estate sector has been having a slowdown due to various reasons, demonetization being one of the biggest. With this slowdown already existing, which was being predicted to wane off in some more time, India and the world got hit by the worst pandemic ever, i.e. Covid 19. India was forced into a lockdown by the Government to avoid the spread of the virus.

This lockdown has resulted in loss of jobs, reduced salaries and an overall impact on the economy, which might be the worst recession that India has ever seen. This economic slowdown has adversely impacted the real estate sector. Buyers have already started defaulting in payment of their loan instalments due to the forced closure of many businesses or offices. s. The end users of real estate projects are now in a very volatile position with the lockdown almost extending every few days and may result in months of closedown if not a complete lockdown.

There are no new buyers in the market, because of the reasons stated above. It is getting evident that the real estate sector is facing losses in crores with the passage of each day. The builders having to stall their existing projects due to social distancing norms and the complete lockdown. The biggest hurdle is the short supply of Raw materials like steel, most of which is imported from China. Now, our country would have to look for alternatives other than China to import some crucial raw materials for construction at least for the next couple of months if not more or encourage manufacturing in India. The other reason is that the construction workers, mostly migrants, from states such as UP and Bihar have returned to their states fearing loss of job and being homeless.

The impact of the COVID -19 virus has been unthinkable in its scope. Investors are expected to remain in a wait-and-watch mode by exercising caution and implementing risk aversion which is to be expected as the dominant behaviour of institutional real estate investors over next few quarters at the very least. . Everything has almost come to a standstill and cannot move ahead unless the entire economy of the world in general, recovers

The commercial real estate has been worst hit which earlier had more investors parking their big chunk. The residential real estate is only going to thrive more on rental business than sale of fresh inventory or resale of properties.

Suggestions on the Road Ahead:

With defaults rising on account of the Pandemic, we need to formulate a strategy on the road ahead, to deal with these defaults. One of the suggestions put forth by the ICC are the relaxations from paying municipal taxes for the first 3 months and provisions for instances where, if the organisations are not able to clear the Bills, they  be given further time of 3 to 6 months to clear all these bills.

Various state governments have given RERA relaxations considering the current situation. For eg MAHA RERA has extended the period of validity of registration of projects by three months, where the validity of a project expires on or after March 15, 2020. The Hon’ble High Court of Delhi has in the case of Anant Raj Limited vs Yes Bank Limited (W.P. (C) URGENT 5 / 2020) ruled that the RBI COVID-19 Relief Packages are even applicable to loan accounts of developers classified as SMA-2 as on February 29, 2020. Further, such SMA-2 cannot be classified as an NPA in case they fail to pay instalments during the moratorium period of March, 1 2020 to May 31, 2020.

Many real Estate Developers Associations are requesting  that the government reduce the statutory or development charges, premiums, GST and stamp duty and provide input tax credit benefit to the sector for atleast one year in order to help combat the existing business loss to the real estate in view of the Pandemic and subsequent lockdown

The three months moratorium already provided by banks based on RBI Guidelines to developers and apartment purchasers, in addition to the extension provided by RERA to developers beyond three months may further be extended, if required under reasonable cause.

Conclusion:

 In order to combat this global crisis, it is recommended that the government implement the Delayed Payment Act in the real estate sector to give support to the buyers who are unable to fulfil their payment obligations. The Government should consider the recommendation by various Associations on interest free loan EMI moratorium for six months to be provided to combat this pandemic situation.

The developers should consider easy payment schedules for end user customers once the deal is signed, amid this Corona Virus Pandemic. This will help reduce cash flow gaps that may happen during this Corona Virus outbreak. The Real Estate Sector contributes to 13% of the national GDP and it is the second largest provider of employment in the country. Hence, it is very important that the Government gives certain concessions in the regulations in order to help the builders and end users to come out of this critical situation.