India Ratings Paint A Gloomy Picture For Residential Real Estate

India Ratings and Research (Ind-Ra) has maintained a negative outlook for the residential real estate sector for the second half of 2020-21. It has revised its recovery estimates on the possibility of a slower-than-expected recovery.

The ratings agency believes the overall residential demand would decline about 40% on-year in the current financial year with the affordable segment to be the worst hit, due to a higher-than-anticipated slowdown, led by the COVID-19 pandemic.

However, the agency has maintained a Stable rating Outlook for its rated residential realty companies for the second half of 2020-21, expecting limited rating movements in its investment grade large real estate portfolio, as the ratings already reflect the agency’s revised expectations.

India Ratings expects ongoing market consolidation for grade I players to be more aggressive than previously, owing to their better brand, execution ability and access to liquidity in the current market environment than that for non-grade I players.

During the first June quarter, the pre-sales of grade I developers declined 22% from a year ago as against the overall residential real estate market in top six cities that was down by 61%, as per the data from Liases Foras.

The ratings agency has revised its pre-Covid19 base case estimates for interest coverage and leverage for FY21 to factor in the impact of the outbreak. It expects interest coverage for grade I player to moderate to 1.5 times-2times for FY21-FY22 as against 2.33 times in FY20 and for non-grade I players to moderate to 1 time-1.3times from 1.35 times.Net leverage for both grade-I and non-grade-I developers during FY20 were better than estimates. However, India Ratings expects deterioration of these for grade I to 62%-70% for FY21-FY22 as against 60% in FY20 and for non-grade I to 80%-85% from 74%.

Many companies have initiated various cost optimisation measures to reduce their costs and focus more on digital offerings. Reputed developers with a track record of timely project delivery are likely to benefit and gain market share, India Ratings said.

The demand-side risks combined with rising uncertainty over credit availability for the sector in the light of increasing risk aversion by financial institutions could add to the refinancing as well as liquidity risks for the sector. Timely execution skills coupled with sound cash flow management and financial flexibility could drive near-term rating actions.

India Ratings expects the sector’s liquidity to face a moderate risk in the near term. Around 27% of the India Ratings rated large developers availed debt moratoriums during March-August 2020 to preserve their liquidity profiles whereas the others had robust liquidity profiles or financial flexibility. Ind-Ra does not expect its high rated large RE player to opt for loan restructuring.

(Source: Economic Times)