Rescuing Real Estate: Corona Shock Can Only Be Tackled If The Developers Undertake Bold And Agile Action

India’s residential real estate market has been battling multiple headwinds recently. The government-backed system clean-up through RERA, GST, demonetisation and the Benami Transaction (Prohibition) Act significantly impacted the housing sector. According to Knight Frank data, sales volume dropped by 10–15%, and new launches nosedived by 25-35% between 2014 and 2019, with a severe inventory overhang in some cities. As a result, the sector faced a severe cash crunch and multiple developers ran into insolvency proceedings.

Covid-19 has added to woes. Consumer sentiment is weak, and demand likely to be muted till there is economic stability and job security. Residential property sales have already dropped 40-45% y-o-y in 1Q2020, with new launches dropping correspondingly. A minimum 25–35% fall in residential real estate sales over the next year is estimated. Also, the inventory overhang and poor secondary sales will impact pricing.

Government efforts to contain the corona outbreak, too, are causing operational disruptions—limited inter-state movement of goods, temporary suspension of construction activities, and labour shortage, etc—that will delay project delivery timelines. Most developers will be faced with significant working capital challenges. Developers are also seeing a long-term impact on working capital needs due to changing customer behaviour, including higher sales late in the project life-cycle.

Covid-19 is likely to have irreversible impacts on consumer behaviour, and the broader society. A wait-and-see approach won’t suffice. Businesses must drive two types of strategic actions to survive the crisis: ‘Act Now’ to protect and sustain the business, and ‘Plan Now’ to retool it for the future.

For ‘Act Now’, company leadership should create a “war room” with a senior cross-functional team, focused on scenario planning, prioritising crisis response, and managing initiatives in with dynamism and agility. Immediate focus themes are:

Pause non-essential spending, especially capital spending and other such expenses. Developers should revise procurement plans based on the slowdown in construction. Companies should freeze hiring, protect current employees, and look at expanding the roles of employees at the headquarter.

Make all business decisions after a careful evaluation of their impact on liquidity. Engage with financial institutions for short term loans at nominal rates, long term changes in working capital needs, and debt restructuring through repayment period extensions and/or reduced interest rates. Liaise with the government for an extended moratorium for interest/principal repayments and deferred GST and TDS payments. Evaluate sale of assets in case of severe cash crunch, and extend RERA-filed deadlines for project completion to avoid penalties. A consortium of developers should represent proposed initiatives to the government and campaign for a stimulus through property tax and stamp duty reductions.

Protect and reassure employees with transparent and frequent communication, aiding remote working,and ensure their physical and mental well-being. The focus should be on internal training and capability building till operations are ramped up. Support contract labour with direct cash transfers and subsidised healthcare. Ensure hygiene of construction sites so that they are safe to return to when the peak is over.

Adopt a customer-centric approach, focused on creating awareness and mitigating fears. Leverage regular customer feedback for this. Work on extending short-term payment support. Re-prioritise channels like digital, telesales, customer referrals with changing customer behaviour, and adopt a refined lead prioritisation and conversion strategy.

Stabilise operations for a ‘new normal.’ Assess supply chain exposure to international geographies and find alternative local suppliers. Request vendors for a temporary delay in payments due to market slowdown and cash flow challenges. Anticipate labour shortages and create a back-up staffing plan with staggered reporting to reduce manpower at the site.

Further, five potential ‘Plan Now’ themes for future-readiness are: build differentiated offerings with innovative products; pursue potential M&A opportunities as distressed assets are presented amid crisis; conduct a comprehensive zero-based budgeting exercise to revise baseline for costs; streamline processes to enable optimal cross functional collaboration; and invest in technology and digital tools for efficient operations.

The current situation is dynamic. It is, therefore, crucial for developers to remain agile and take bold actions to ensure the survival of the business through the crisis, and use the opportunity to retool for future success.

(Source: Financial Express)