Rating agency Fitch has assigned a negative outlook to the Indian real estate sector in 2012 due to overall weak demand and higher construction costs.
According to the report — 2012 Outlook: Indian Real Estate Sector — the demand in 2012 would remain sluggish. “High equated monthly installments (EMIs), resulting from significant higher interest rates, lower household surplus due to high inflation and high residential unit prices have reduced affordability of homes,” the report said.
The report added that the purchases are likely to remain low during the first half of the calendar year.
The report said that the regulatory issues such as the rate increase by the Reserve Bank of India, the demand side has been impacted. There is a lot of pressure on the existing loan payers as the interest rates have gone up in 2011.
On the supply side, the report said the increased cost of the development that is also affecting the margins of the real estate companies. Also, many realty firms had to sell their non-core assets with a view of deleveraging themselves as many companies had over leveraged themselves.
“Declining profits have resulted in leverage at high levels in 2011 and this is expected to continue in 2012, hurting the creditworthiness of the real estate companies,” the report said.
Realty firms are also facing liquidity pressures where they are finding it hard to raise capital for projects.