V,W,L or U
Given the recent announcement for an extended lockdown, it would only be natural to be concerned about the economic outcome such an event will have on the real estate industry and consequently its stakeholders. The effects of such a black swan event can be analyzed and graphed out as ‘V’, ‘U’, ‘L’ or ‘W’ shaped recoveries. The impact of this pandemic should be assessed across all three time-lines of short, medium and long term.
In the short term, while the lockdown is being imposed, the impact will be most severe as all sales and construction would have come to a standstill. Depending upon the period of the lockdown, will be the period for re-mobilizing work on construction sites and getting activity back in full swing. The main challenge will be to retain the workforce as in most sites they mainly constitute of migrant workers. If this labour goes back to their hometowns then the time-line for re-mobilizing will become longer. In short, I estimate that the first quarter of this fiscal year would be a write-off with respect to construction and sales.
Once the lockdown is lifted and businesses are allowed to resume work partially or fully, the time and effort taken to re-mobilize sites will determine how well we fare in the medium term. Due to the long hiatus, the industry as a whole is likely to face a number of challenges as they try to re-start. Problems like labour shortage, supply chain bottle necks, lack of machinery, material scarcities, etc. will be predominant as everybody scrambles to get back to business as usual. Either we will be able to quickly recover, despite the impending issues, and move in a ‘V’ shaped trajectory or our mobilization will take time, resulting in a plateauing effect at the bottom for a while rather than an immediate upward movement. This would mean that in the medium term we will see the bottoming out and slow stabilization of the industry.
Due to the disruption in the short and medium terms, several direct and indirect impacts will be felt in the long term. One of the biggest direct impacts will be that of costs going up. If such costs cannot be directly absorbed or translated into higher sales prices, developers will be forced to squeeze their margins in order to sustain themselves. Cost and time overruns are likely to impact delivery schedules and the overall quality of work. Indirect impacts are likely to include a complete reassessment of the overall design and architecture of buildings, higher levels of sanitary conditions in homes and offices and additional provisions within complexes to facilitate the need to WFH and self-quarantine.
Whether our recovery takes a ‘V’ shaped trajectory and recovers quickly or we continue to skid at the bottom until the industry comes out of its structural issues, thereby taking a ‘U” shaped route, only time will tell. Another possibility we cannot negate is that after a quick recovery we might plunge once again, due to a second or third wave of the pandemic, changing our path more towards a ‘W’. I believe, that if the lockdown is partially or fully lifted by May, we are likely to take all of June to be able to restart. If the virus is contained, we would require the next three quarters to stabilize and get back to normal as the crisis will have had an effect across the board. In my opinion, we are most likely to see a ‘U’ shaped recovery: a plunge occurring in the current quarter and subsequently stabilizing in the following three quarters, before we start to see a climb again.
In the worst possible scenario, the industry will have an ‘L’ shaped outcome, which would indicate a continued slow down and recession over the next couple of years. However, I would tend to bet against such an outcome because the Indian economy is highly resilient, and being mostly domestic driven, should be in a position to rebound in a year’s time at the outset. The positive factors underlining such an assumption would be a slump in oil prices, a strong dollar giving a flit to NRI demand and local sales also coming back strongly given the repressed demand of the last few years. It is imperative that all stakeholders remain positive and optimistic as this is one industry that will be in the vanguard of an eventual and evitable economic recovery.
“Views expressed are the personal views of the author. Any action taken based on the views will be the responsibility of the user alone.”
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