As this article is being published, India is in a precarious position, with the ground situation changing every hour, as it trying it best to contain the phase-2 of the COVID-19 or Coronavirus pandemic. Given the huge population of India, the low permeability and uneven spread of healthcare systems and the logistical impossibility for India to enforce mass quarantine, it would require a huge collective effort to tackle this challenge. Although India has somehow miraculously delayed the onset of the first stage, the future looks uncertain on where the pandemic will lead India too.
In the meanwhile, there have been global disruptions on account of this pandemic and India has had its fair share of the disruptions. We need to see this disruption into two phases, first with the epicentre in China and the other in Europe.
The effect of Coronavirus with the Chinese epicentre was felt early February. Most of the Indian construction industry imports at least some components of construction from China. The largest imports related to the construction industry are iron and steel products, technical construction equipment, electronic equipment, plastic and fibre elements, solar panels, furniture and fit-out goods. The hold on Chinese exports sent a shock wave along the supply chains, which due to a reasonably strong local inventory was not immediately felt in the Indian market. However, heavy reliance on China for steel and steel products is a cause of concern for the industry. With production in China going down, the prices in the allied industries are bound to increase, thereby increasing the costs and reducing the profit margins of real estate developers in India.
Hospitality and housing segments that placed bulk orders of fit-outs and furniture to Chinese suppliers, were left uncertain on delivery times. Projects with tight deadlines had to source other markets for securing the supplies. Again the Indian market has been able to provide for some alternatives however the cost competitiveness of the Chinese manufactures cannot be matched and hence many projects have deferred their completion timeline and handover dates.
However, the second wave of COVID-19 with the European epicentre has much reason for serious concern. Italy, the nation worst hit is the world’s leading supplier of luxury construction, stone and fit-out goods, it also exports some of the best furniture all over the world.
The first causality was Salone del Mobile, the world’s largest furniture expo that is annually held in Milan, with some of the world’s leading furniture manufacturers investing millions of Euros to display their products to an international audience. Many companies time their product launches to attract international designers and media attention and production cycles match the timings of the show. Fearing a low turnout, due to the initial few cases found then in Italy, as well as Chinese travel ban to Italy, the show was postponed from April 2020 to June 2020 and with the current state of affairs in Italy, this date to seems bleak.
Though furniture companies have sent across flyers to all leading architects and distributors, of their continued production and commitment to timelines, the future looks uncertain, on when the Italian supply chain can actually resume normalcy.
On the economic front, the stock markets took a huge tumble worldwide including India. With the Sensex and Nifty dropping to record lows the stock market is in turmoil. It is reported that with the loss of tourism revenue, many travel operators, hotels and airlines may be forced into bankruptcy, further adding to the domino effect of a plunging economy.
India’s growth slowed to a near seven-year low of 4.7% in October-December 2019 on a continued slump in manufacturing, and now faces the next big challenge of Coronavirus outbreak stifling global growth. And the economy of China—the epicentre of the initial infection—now faces much weaker growth as the spread of the virus has hit both production and exports. The Indian Government has, in line with various international governments, readied a financial support package to tackle the aftermaths of this pandemic, however, it is premature to estimate the effects of this package.
The Fall of the Chinese economy, however, had a silver lining as India climbed three rungs to the second position among key emerging markets in February and stood just behind the Philippines last month as per the latest update to Mint’s Emerging Markets tracker. India’s rise was as dramatic as China’s fall, which slid five rungs to the seventh spot among the 10 markets considered by the tracker. Economic disruptions caused by the novel Coronavirus outbreak led to China’s fall and supply chain disruptions meant that other Asian economies too suffered.
Given that India is relatively less integrated with Chinese supply chains compared to other emerging markets, India emerged relatively unscathed last month. But as the contagion spreads, and asset prices crash globally in anticipation of larger disruptions, India’s own economic position could shift sharply in the coming months.
The epidemic has also underlined the importance of over-reliance on China’s products in the Indian market. Countries like Australia with a heavy reliance on Chinese products have suffered and it is high time that the government encourages Indian manufactures to step up local production. Incidentally, India is the second-largest producer of steel after China and this can be used to India’s advantage.
As the Chinese supply lines are skewed, the industry has an opportunity to explore other markets to procure raw material and decrease dependence on Chinese imports. This could be a blessing in disguise for the indigenous production of imported goods such as metal panels, steel bars and heavy machinery. Further, the solar panel manufacturing companies can also benefit from the reduced supply and increase production to bring down the long-term cost.
However, the real estate sector is different in many ways to the stock market. It is much slower moving and the leasing fundamentals do not fluctuate on a daily basis. It will at some point display the sum of the aggregate market trends as a new benchmark price and that most certainly looks on the downward side right now. The intrinsic domestic demand for housing will remain to be strong and perhaps the price correction due to the epidemic may open an opportunity for buyers to buy properties on a much lower value.
In the coming months, there will be far lesser footfalls for new project launches, deferred handovers, extended timelines fewer walk-in enquires for the real estate. Design product suppliers may see some short-term upswing in demand to compensate for the loss of imported inventory but this will dry up as the supply chains have been hit and it will take many more months to cover up.
There is a price correction expected in line with the global asset price crash. However, commercial leasing will still look un-impacted due to a healthy long-term investment by many international companies in the positive India growth story.
All this may change with the big question is on how India fares in the coming fortnight in its fight against the virus. As the world decides to wait and watch, the onus lies heavily on India to contain its outbreak.
In the time of this uncertain future, we have a golden opportunity to be optimistic. Indian real estate and allied manufacturing industries must find positivity in the scenario and benefit by increasing production and indigenous innovation. After all, the world and India, has witnessed many more deadly epidemics than COVID-19 in the past and we have successfully bounced back.