Challenges to persist over next 12 months for realtors, says Moody’s

MUMBAI: Moody’s Investors Service has said that India’s bigger property developers will continue to face a challenging operating environment including weak cash flows, flat sales and stagnant prices over the next 12 months.

Developers such as Indiabulls Real Estate, Lodha Developers, Unitech, DLF Limited and Oberoi Realty will experience relatively more pressure on sales and cash flow than the smaller firms because they operate in Delhi and Mumbai, where prices are the highest, the United States-based rating agency said in a release.

Acceleration in economic growth will, however, provide some support to housing sales and the likely gradual easing of lending rates will boost investor confidence and investment activity, said Vikas Halan, vice president and senior credit officer at Moody’s.

“Cuts in interest rates by the Reserve Bank of India, if passed on by the banks, will filter down to the property market, reducing the cost of borrowing for developers as well as buyers, and supporting demand,” said Halan.

India’s real estate sector has been witnessing weakness in sales momentum, rising inventory and debt levels for the past three years. As per the latest data, unsold housing stock across top eight property markets in the country rose 18% to over 1.1 billion sq ft as on June 30. Barring Hyderabad, all other cities have shown a rise in the unsold inventory, with Bengaluru showing maximum increase of 55% compared to a year ago.

Though the growth in unsold stock in the National Capital Region has been just 7%, the region tops the chart with 326 million sq ft, followed by Mumbai Metropolitan Region at 201 million sq ft.

Developers in relatively affordable markets like Bengaluru, such as Brigade Enterprises, Prestige Estate Projects and Sobha Developers, should fare better, owing to stable demand for housing.

Moody’s also highlighted that the ability of developers to execute projects across markets has been challenged in the past twothree financial years owing to delayed approvals and stretched liquidity.

Such delays have slowed the flow of payments from homebuyers and reduced investor demand for new projects by locking up their capital and decreasing their expected returns.

Rather than reduce prices outright to drive sales volumes, though, developers are likely to continue to modify their products and offer promotions.

Moody’s is of view that consumer confidence will get a boost from the Real Estate (Regulations and Development) Bill, which seeks to set up a regulatory authority and introduce guidelines for commercial and residential development.

Developers will face stricter terms over the receipt and use of cash advances, though, which will further weigh on cash flows.

The agency said that the bill promotes transparency, accountability as well as discipline in the industry, which is positive for buyers.

Provisions about the registration of projects, submission of approvals as well as adherence to timelines will help dissuade unorganised development and thus be a positive for the real estate sector, according to Moody’s.