Covid19 impact on the housing industry

I wish I had a crystal ball and could peek into the future. Alas! I do not have a crystal ball but the human mind has been blessed with the power of logic, the ability to analyze and thus draw well founded conclusions.

At bti we are obsessed with data. We gather and analyze all kinds of data and on the basis of this analysis we plan our future course of action and strategy. In tune with this practice I asked our various teams to provide me with the relevent data so that I could create a poor substitute for a crystal ball.

Here are the facts. This data is pertaining to the Dhaka and Chittagong market only.

The housing industry as a whole has an unsold inventory of about 20,000 apartments at the moment.

The housing industry has sold on average 1000 apartments per month in the year 2019.

This translates to an inventory overhang of about 20 months. (20000÷1000).

My estimation is that post covid 19 there will be a fall in the volume of sales of at least 30% .This means that the monthly sales will be down to 700 apartments per month.

There are new projects in the pipeline for which the developers have signed agreements with the land owners. These projects are in different pre construction stages like designing or Rajuk approval. This incubation period on average is about 2 years. (Some of these projects would be in the early stages of design and some would be in the final stages of Rajuk approval and others somewhere in between). My estimate is that there would be a total inventory of about 28000 units in this incubation phase and out of these about 16000 new units will be coming into the market over the next one year. This means that the inventory overhang at the end of 12 months after the Covid19 era will increase to about {20,000- (700×12)+ 16000= 27600}. Assuming that 700 units sell per month, this means an inventory overhang of about 39 months one year after we resume post covid 19 activities.

It is to be noted that the worst period for our housing industry was between 2012 to 2016 when our prices fell by about 30% and in 2014 the unsold inventory was about 18000 units with an overhang of about 25 months. (Industry average sale was about 700 units per month).

Based on the above analysis, one year after the end of the covid 19 era with an inventory overhang of 39 months our housing industry would face the most precarious condition since its blossoming in the early 90s. Most developers incurred heavy losses from 2012 to 2016. And just as we were recovering from the last crisis, we have now been hit by this “mother of all crises”.

Not too many developers will be able to sustain this market lull. The only two options would be to 1. Abandon the project. 2. Delay the completion and handover of the project by at least one year. Since the industry is extremely competitive now and works with paper thin margins the option of reducing prices to entice customers is not on the cards. Many of the smaller developers who have limited access to funds offer the land owners very attractive ratios and also sell their projects at low prices. Since their investment is very low, even a nominal profit from the project means a good return on their investment. Because of their very low equity in the project, these developers would be the ones to abandon the project as we have also seen in the past. The developers who decide to continue the project will obviously have to delay the commencement of works on the project till such time that the market is able to offer them at least a breakeven price. This would mean a delay of at least one year in completion of the projects. During this time the developers would be bleeding because they would still have to bear the overhead costs. They would be forced to lay off or furlough many of their employees. Hundreds of thousands of construction workers will not have any work. Many of the developers who have taken loans from banks will become defaulters. There are about 269 backward linkage companies that are directly associated with this sector. All these companies will also be very adversely affected on account of the crisis in the real estate industry.

The completion of most projects would have to be delayed by at least a year under the force majeure clause in the agreement. Even if we consider the unlikely scenario where no projects are abandoned, let us consider the economic impact of the one year delay in the handover of the projects.

Presently in Dhaka and Chittagong there are 3000 under construction housing projects at different stages of construction comprising of 60,000 apartments. Since the standard ratio in our industry is that the land owner gets 50% apartments in any project, the various land owners would have about 30,000 apartments under construction. The other 30,000 apartments would be the share of the developers and if out of these, 20,000 units are unsold then 10,000 are sold.

If the value of the 10,000 sold units is approximately Tk6500 crore then the rentals on this asset will also be lost for a year. This pain would be felt by these 10,000 buyers. Assuming a rent of 3% per annum on the value of the property, the cumulative loss to the buyers of these apartments for a period of 12 months would stand at Tk195 crore. Many middle income people borrow money from banks and other financial institutions to pay for their apartment purchase. Even though the project is delayed, the interest on their home loans would keep accruing. This would almost certainly lead to massive defaults by these buyers on their home loans.

The land owners’ share of 30,000 under construction apartments would also be delayed by one year. If the value of these 30,000 units is Tk19,500 crore then the land owners stand to lose Tk585 crore on the rent of these apartments.

The objective of writing this article is not to be a doomsday advocate. I have tried to analytically justify my views. Right now everybody is thinking of saving lives from this terrible catastrophe that the world is facing. Soon in sha Allah this pandemic will be over and then we will all try to pick up the pieces and resume our normal lives. That is when the harsh economic realities facing the housing industry need to be seriously looked at. The old proverb a stitch in time saves the nine may be an important one to remember.

The simplest and most effective measure is that the government plays an important role in preventing the market from collapsing. The real estate industry is a very sentiment driven one. It is not that the buyers will suddenly not have the money; it will be the fear factor and the uncertainty that would prevent them from making the investment. Unless the buyer is given some incentive he will remain in the sidelines and the scenario described above will play out. However, if proactive policies by the government can stimulate the market it will have a cascading effect where more and more investors will take the leap of faith thereby saving the industry and preventing the apocalypse.

In my earlier article I had proposed two simple measures.

1. Home Finance @5% for those who buy apartments in the next one year. This will spur aggregate demand and act as a confidence booster for the prospective buyer. About Tk300 crore home loan is disbursed annually by the private banks and financial institutions. Assuming that the normal rate of interest on these home loans is 9% then I am proposing that the government subsidize 4% interest on these home loans. Over a period of 10 years of annual compounding interest this would cost the government exchequer Tk444 crore. Meaning Tk 44crore annually. This amount is negligible compared to the losses that the housing industry, the linkage industries, the buyers of apartments and the land owners would lose if no proactive stimulus is given to the housing market. The social impact of thousands of professionals and hundreds of thousands of construction workers engaged with the housing industry becoming unemployed must also not be taken lightly.

Here it is also pertinent to note that even prior to the covid 19 crisis the Indian government has introduced a very ingenious policy to support the housing industry. The government is giving 6.5% subsidy on the entire interest of a 20 year loan and pays it up front to the loan account of the buyer. This reduces the total loan amount and hence the EMI goes down.

2. 50% reduction in the registration cost of the apartments purchased in the next one year. The current cost of registration in our country is one of the highest in the world. This initiative will not only motivate the prospects to buy apartments in the next one year but to also take advantage of the opportunity and complete the registration process which is normally procrastinated because of the high cost of registration. In fact this will add revenue to the government exchequer because of the increase in the number of registrations done.

The housing industry contributes more than 5% to the GDP of Bangladesh and is estimated at $15billion annually. Today it stands shaky and extremely vulnerable. It is pleading to the government to extend a helping hand. I hope that the government does not let us down.