Impact Of COVID-19 On The Real Estate Sector In India

Impact On The Real Estate Sector In India

Unexpectedly, the outbreak of COVID-19 has remained relatively contained in India, as a result, it has not had a significant impact on the domestic real estate market so far, However, the uncertainty looming over the prolonged impact of COVID-19 is not favourable on the real estate industry. With the ongoing lockdowns and travel restrictions, the supply chain of raw materials is severely hampered given the fact that India heavily depends on China for steel, iron, furniture, fixtures and fittings supplies etc. COVID-19 has resulted in the stoppage of work, non-availability of labour, delayed possession, restrictions on travel and movement of goods and postponement of physical meetings about crucial decisions etc. It is estimated that this could trigger lay -offs, salary cuts and fall in property prices by 10-15 percent.^[4]

LEGAL MEASURES AND REMEDIES

Force Majeure

It is also crucial to note that the timelines for completion of projects will be affected delaying in handing over possessions to homebuyers. As a result, promoters are expected to resort to much talked about expression "force majeure" under Section 6 of The Real Estate (Regulation and Development) Act, 2016 for extension of registration granted to a project not exceeding one year. The explanation to Section 6 defines the expression "force majeure" and provides that "…any other calamity caused by the nature affecting the regular development of the real estate project".^[5] Thus, COVID-19 is likely to come under the scope of such explanation and can be invoked by promoters to their relief, however, it still remains a fact-specific determination depending on nature of the specific terms of the contract and on the nature of the party's obligations affecting "regular development of the project". It may be noted that invoking of force majeur provision shall not absolve any developer of its contractual obligations but only delays the performance of the contract for a given period of time as defined in contracts entered into between the parties.

Notifications Issued By the Regulatory Bodies In India

In light of disruptions caused by COVID-19, the Maharashtra Real Estate Regulatory Authority ("MahaRERA") by an order on April 2, 2020 has extended the period of validity for registration of projects by three months.^[6] This order applies to all the MahaRERA registered projects where completion date, revised completion date or extended completion date expires on or after March 15, 2020. Further, in a major relief to developers, the time limits of all the statutory compliances, which were due in March / April / May are also extended to June 30, 2020.^[7] Following the lead, Karnataka Real Estate Regulatory Authority ("KRERA") has issued a circular providing similar relief to the sector.^[8]

The regulatory bodies, as well as various ministries of the Government of India, are regularly issuing guidelines and advisories to ease compliance norms amidst the COVID-19 outbreak. Recently, on March 23 Securities and Exchange Board of India ("SEBI") extended the timelines for all filing and compliance obligation of REITs and infrastructure investment trusts for the period ending March 31, 2020, by 1 month.^[9] Similarly, Reserve Bank of India ("RBI") on March 27, 2020, issued a set of measures for relaxing repayment pressures and improving access to working capital.^[10] Therefore, banks may allow moratorium of 3 months on payment of installments in respect of term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, maybe shifted across the board by three months. This will tremendously help homebuyers and developers by providing them with immediate relief in times of distress as well as comfort on overall developer cash flows. COVID-19 has affected the purchasing power of home buyers and financial capacity to honour home loans. Thus, these measures will go a long way in tackling termination of under-construction bookings by homebuyers as well as defaults in honouring home loan instalments. The Real Estate Developers' Associations of India ("CREDAI") had demanded that "Loans by real estate developers should also not be classified as NPA in case they default on interest or principal repayment due to COVID-19".^[11] The RBI vide press release dated March 27, 2020, also clarified that moratorium/deferment provided will not result in asset classification downgrade. Timely and effective measures are much-needed lifeline at this juncture. It is hoped that the government continues to be vigil and quick in tackling issues arising out of the pandemic and tide over the real estate sector over the economic fallout from COVID-19.

Measures Taken By The Government

To support 3.5 crores of construction workers during the lockdown, who sustain their livelihood on daily wages, the Government of India has issued an advisory to all the States/UTs to transfer funds in the account of construction workers through DBT mode from the Cess fund collected by the Labour Welfare Boards under the BOCW Welfare Cess Act, 1996.^[12] In addition to the relief provided by various regulators, this step will go a long way in stopping them to explore alternative employment opportunities during the lockdown. As a result, it will reduce the burden on real estate developers considering the immediate requirement of workforce post lockdown.

Moreover, vide advisory dated March 20, 2020, all the Employers of Public/Private Establishments are also advised to extend their coordination by not terminating their employees, particularly casual or contractual workers from the job or reduce their wages.^[13] This will further help the real estate sector sustain if the casual or contractual workers who are the backbone of the construction industry are not terminated.

COVID-19 has led to a large-scale movement of migrants including construction workers in some parts of the Country so as to reach their home towns. To safeguard the interests of migrant workers, the Ministry of Home Affairs by issuing an order has mandated all the employers in the industry or in the shops and commercial establishments to make payment of wages without any deduction, for the period of lockdown.^[14] The Hon'ble Supreme Court has also directed compliance by all the stakeholders of the directives, advisories and orders issued by the Government in letter and spirit,^[15] which in turn has further burdened the employers under Real Estate Sector. In light of the same, the NAREDCO has demanded to lift the lockdown partially on construction site to continue the work while following all the guidelines by the Government.^[16]

CONCLUSION

As a result of unprecedented situation created by COVID-19, there is a much greater emphasis on the health and wellness of the employees/construction workers as well as workplace hygiene than ever. Post COVID-19, it is expected that newer remote working policies, flexible space options and work from home are in vogue.^[17] Therefore, if the solid foundations of the Indian real estate sector are in place it can withstand the pressure and mitigate the effects. It is paramount to increase the domestic production capacity to fill the void created by hindrance in global supply. This also gives a unique opportunity to be less dependant and build a self-reliant real estate industry in India. As of the first week of March, 81 percent of manufacturing companies that export goods from China have resumed doing business.^[18] It is likely that similar to the extension of deadline by MahaRera & KRERA, other RERAs across the states will extend the deadlines for completion of all pending projects or declare the period of lockdown as a Force Majeur event under Section 6. To loosen the impact of COVID-19, the NAREDCO has sought $200 billion relief from the Government as well as requested to suspend all NCLT activities for the next six months,^[19] however, it is yet to be seen how the Government responds to the same. It is hoped that with drastic measures in place the recovery under the real estate sector is possible sooner than later and the investment is likely to increase at an upward rate.