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Jan 18, 2012, 12.35 PM IST | Source: Moneycontrol.com

Indian real estate sector outlook for 2012: Fitch Ratings

Fitch Ratings has come out with its report on Indian real estate sector.

Fitch Ratings has come out with its report on Indian real estate sector.

Negative Outlook: Fitch Ratings’ outlook for 2012 for the Indian real estate sector is negative due to weak overall demand and higher construction costs, which are likely to continue to squeeze margins.

Sluggish Demand to Continue: High Equated Monthly Instalments (EMIs), resulting from significantly higher interest rates, lower household surplus due to high inflation and high residential unit prices have reduced the affordability of homes. Purchases slowed significantly during H1 FY12 and are likely to continue at these new levels during the first half of 2012.

The oversupply of commercial space continues in some markets. However, the demand for office space is likely to be maintained at 2011 levels as the hiring momentum of the IT/ITeS sector, the major driver of office spaces in India, continues into 2012. Demand for retail commercial space is expected to be low in 2012. 

Margin Pressure: Depressed demand, together with increased construction costs - both material and labour - have compressed margins and this is likely to continue into 2012.

Regulatory issues: The Reserve Bank of India has continued to increase policy interest rates in 2011. Home loans with step up interest rates were also discontinued by home loan lenders, due to pressure from the RBI. Both these factors have led to an increase in EMIs.

Deleveraging: Gearing continued to increase for most companies in H1-FY2012. Some real estate companies reduced their gearing levels in FY12 by selling non-core assets, like land parcels and IT Parks. Overall, gearing of large real estate companies has decreased by about 20% from the post-crisis peak of around 0.89x. However, declining profits have resulted in leverage (debt to EBITDA) at high levels in 2011 – at around 7x – and this is expected to continue in 2012, hurting the creditworthiness of real estate companies.

Liquidity Pressures: Fitch expects the dependence on operational cash flows to fund growth and service debt to increase. Foreign direct investment (FDI) and private equity (PE) funding has dwindled and a weak equity market no longer makes IPOs a viable funding option. All this, together with the banks’ cautious approach, limits fund raising options. Thus, developers of commercial properties, which have stable rentals as a significant portion of total revenues, will have stable credit profiles but the outlook for the industry a whole is negative.

Economic Slowdown: Slowing GDP and the spectre of job losses during the previous downturn in 2008 may lead to the postponement of purchase decisions, further affecting residential demand.

What Could Change the Outlook:

Demand is Key: Improvement in demand, either due to a decrease in interest rates or the launch of new projects at affordable prices, would have the potential to improve cash flows to real estate companies and change the outlook to stable.

Prudent financial management, together with a slower build up of land banks, increased reliance on project advances and judicious use of cash generated by liquidating existing inventories, will help boost stronger capital structures. This improvement may result in selective upgrades of companies in the sector, even while the overall outlook is negative.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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