Gurugram, 27 May 2020 – In the span of few months the COVID-19 health crisis has become an economic crisis. In response, the Indian government announced a financial stimulus of about INR20 trillion (USD267 billion). The aim of the intervention is to inject liquidity into the financial system, revive the economy, limit the impact on the labour market and boost confidence. In our latest report ‘India’s Financial Stimulus to Combat COVID19’, our Colliers Research has analysed that liquidity and credit schemes account for about 74% of the package, while monetary and fiscal support accounts for the remainder (26%), showing modest immediate income support to India’s poor.
Sankey Prasad, Managing Director & Chairman at Colliers International India believes “that the impact of the stimulus will be long-lasting, led by structural reforms introduced for certain sectors. The government’s INR300 billion (USD4.0 billion) special investment scheme for non-banking financial companies (NBFCs) is expected to help ease liquidity”.
“The package accounts for 10% of the Indian GDP making it not only the highest in the emerging economies but also the 5th largest in the world in terms of percentage allocation to GDP. We believe the structural reforms, liquidity schemes and fiscal support provided by the central bank and Indian government are expected to provide some relief to stressed asset classes of Indian real estate. Furthermore, we believe faster implementation of the package should help reduce the impact of the economic uncertainty brought about by COVID-19. However, there is a need to stimulate immediate demand in the sector,” says Megha Maan, Senior Associate Director, Colliers International.
The analysis of the announcements related to the real estate sector is shared below:
- Notable reduction in repo rate to 4.0%, reverse repo to 3.75% and cash reserve ratio (CRR) to 3.0% to give incentives to banks to infuse credit into the economy.
- The credit-linked subsidy scheme (CLSS) for the housing sector has received an extension up to March 2021, providing an incentive of INR700 billion (USD9.3 billion) to homebuyers.
The government’s CLSS scheme offers subsidised interest on home loans for affordable and middle-income housing. The extension of subsidised interest rates should offer comfort to those homebuyers who are on the fence about home purchasing. In addition, the RBI has cut the repo rate to 4.0% to mitigate economic risks, with certain banks such as State Bank of India offering lower home loan rates to consumers. However, we believe that the demand for affordable homes, and the entire residential sector will hinge upon the revival of employment and the economy in 2020.
- The RBI has allowed NBFCs to extend the date for commencement of commercial operations (DCCO) for loans given to commercial real estate by an additional year, providing relief to commercial real estate developers’ cash flows.
Extending the DCCO, to which the repayment schedule of an entity is linked, should provide a lifeline for developers in terms of financial stress and help them manage cash flows better. The resultant shift in repayment schedule cannot be treated as restructuring for commercial real estate projects. This ought to help developers use this relief to plan and alter construction timelines of their ongoing projects.
Industrial & Warehousing
- The government has provided INR1.0 trillion (USD13.3 billion) to agriculture infrastructure, INR200 billion (USD2.7 billion) to fishermen and INR100 billion (USD1.3 billion) to micro food enterprises. This support is aimed at strengthening the farm gate infrastructure in order to reduce wastage and improve realised prices.
Farm gate infrastructure includes cold chains, storage centres, logistics and aggregation points. While the government plans to manage the storage centres, we believe that developing and creating modern warehouses and cold storage facilities for agriculture, and agri-based small businesses should emerge as an opportunity for private developers and third-party logistics players.
- The government has allocated INR81 billion (USD1.1 billion) towards social infrastructure, providing viability gap funding up to 30% of the total project cost.
This move is expected to play a key role in creating new clusters for real estate development. We recommend developers to explore this scheme to plan social infrastructure projects in the micromarkets where their projects/land banks are situated.
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