Nearly a year ago at the peak of the COVID-19 crisis, the Mumbai real estate market was outright panic. An existential crisis for humanity was being debated. The housework had intensified the possibility that the life of the city was becoming meaningless and at the same time the demand for housing was also increasing. The economic cost of the epidemic was difficult to estimate, but everyone anticipated that the damage would be substantial.
As the second-wave of COVID-19 boosts financial capital, at the moment – so far there has been no panic among stakeholders. A major reason is that COVID-19, while taking and killing many people, is not as scary as it was initially anticipated. Secondly, the economic impact of COVID-19 has not been as severe. And third – the government’s strong sales cuts for many customers generated a level of stamp duty and trust that had previously been absent.
Nevertheless, it would be a brave (or listed) developer who would claim that the area is on a strong pedestal. Most of them knew that things would soften after the March 31, 2021 time stamp duty exemption expired. The only point of debate was the extent to which the sales would be tempering.
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In my last column I speculated that an accident was unlikely for the real estate sector, although a recession was imminent. This was before the second wave. I still watch that scene. A big reason for that approach is my belief that a large number of developers have become rational in their expectations. The plan has become better. On the key aspect of pricing in an expensive market like Mumbai, everyone has learned their lessons. The age of illusory pricing has come to an end. The CASA formula is being adopted and is seeing success – reliable builders, aggressive pricing, small apartments and facilities.
This does not mean that the industry can rest easy. The momentum generated between September 2020 and March 2021 was in the account of all stakeholders, which was done by their bitcoins: builders, government and lenders. Along with the demand for pent-ups, future demand has largely changed over a seven-month window. The cost of ownership for a home buyer was reduced by 15% in a large number of cases. It was not uncommon to see a profit of 20% even in select projects. The developers did a lot of lifting but the lenders and the government also contributed. Lenders introduced attractive schemes to encourage the closure of the deal. The contribution from lenders is now starting to decrease. With the removal of the stamp duty waiver, government support is over. This means that in order to attract customers, the developer will have to take greater responsibility.
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There is debate over whether prices will fall again with COVID-19. As expected, the consensus among most developers is that prices do not fall from here, but will stabilize at current levels in the medium term. On this aspect, I agree with the industry to a large extent. In my view, prices will not decrease significantly from here. Most developers have thrown out every bit of potential cost reduction for the home buyer over the past year. Some developers may still have a small buffer to offer buyers but this will be very limited.
Thus, in the near-future (not in the immediate future), the market will return to the sluggish stability that prevailed before the epidemic. Unlike the recent past where sub-projects also gain traction, moving forward will discriminate in the choice of projects that will thrive. Only select projects will have acceptance while many will struggle.
If the FSI premium deduction was taken to its logical conclusion, the scenario could be further strengthened. This is the amount paid by developers to the government to get permission to create more and more areas in a project. For a very long time, this spending was out of control, although housing demand and prices remained weak. Three months ago, it appeared that the government had opted to cut the FSI premium. Unfortunately as clarity emerges on the terms associated with it, there is a distinct conclusion that the benefit of the premium deduction will be for very limited projects and developers. As Nishant Deshmukh of Suge Group states: “Developers should be accountable to customers and people who will not survive anyway. But this is the time when government help can really save the region. “
