Revising the outlook for the real estate sector in 2017 to negative from stable, Fitch Ratings has warned that residential property sales of most developers are expected to weaken by at least 20% to 30% in 2017 following the government’s demonetisation move to curtail undeclared wealth and this is likely to take a toll on demand. Slower sales means less cash collection that will impact construction timelines, the agency says in its latest report.
Property and gold are popular instruments for investing undeclared income in India’s large cash-based economy. The demonetisation comes at a time when property demand in India had slowed due to rising unsold inventory and high prices.
“We expect the credit profiles of most homebuilders to weaken as slower sales could mean cash collections will lag construction commitments. This would be particularly true for companies that have aggressively expanded their land banks in the last two years, using cash collections from previously sold properties. On the other hand, companies that have liquidity to complete their projects within the next three to six months may be temporarily insulated from the shock. We expect leverage (defined as net debt/adjusted inventory) of the seven large homebuilders considered in this report to increase in 2017, from around 87% in end of March 2016 (FYE16) and 82% at FYE15. Aggregate sales of these seven companies fell by 3% to Rs 236.5 billion during the financial year 2016,” it says.
Seven large developers considered for the report include Lodha Developers, DLF, Prestige Estates, IndiabullsReal Estate, Godrej Properties, Sobha and Unitech.
The report also expects unsold inventory to increase in 2017 as a result of weak demand, particularly in the National Capital Region (NCR) – which is believed to have the most significant cash-based economy. Industry data shows that the NCR had the highest unsold inventory – of around 16 quarters of sales as of June 2016 – while unsold inventory in Mumbai and Chennai was lower at around 10 and seven quarters of sales, respectively.
The decline is likely to be more pronounced on sales of higher-end, premium property which is targeted by high-net-worth individuals and investors, and not entry-level housing sought by first-time homebuyers and which are more often purchased by salaried individuals with limited undeclared income. A sharp correction in property prices may support a revival of demand over the longer term.
The report also assures that stability could return to the real estate sector and improve credit profiles if there is a resurgence in demand for residential property. However, this will have to be preceded by a sharp reduction in property prices (possibly over several years) combined with a slowdown in new property launches which could lead to less unsold inventory, the report adds.