If the novel coronavirus, or COVID-19, outbreak lasts longer, it would not only impact economic activity but may also have a significant impact on real estate developers’ cash flows and project execution abilities, giving rise to wider credit negative implications, ICRA said in a recent report.
Nonetheless, the three-month moratorium announced by RBI on term loan instalments provides comfort on overall developer cash flows, it added.
The residential real estate sector has been reeling from the adverse impact of the prevailing liquidity crunch, high inventory overhang, weak affordability and subdued demand conditions. ICRA expects the coronavirus outbreak is further exacerbate weakness in the sector, with a moderation in sales and collections.
"Reduced construction outflows, attributable to a slowdown in project execution activity, reduced labour force presence and raw material supply chain disruptions, are expected to limit overall decline in net cash flows in the case of a short-term disruption. The three-month moratorium on term loan instalments announced by the RBI also provides comfort on overall developer cash flows during this period.
"In case of a longer outbreak though, the impact on overall economic activity is likely to be deeper and more sustained, which would result in a more significant impact on developer cash flows and project execution abilities, giving rise to wider credit negative implications," the report said.
Well-diversified developers with strong balance sheets and adequate liquidity are expected to be better-positioned to manage the risks arising out of this event, including reductions in collections and disruptions in project execution.
Commenting on the findings of the report, Mahi Agarwal, Assistant Vice President and Associate Head at ICRA, said demand risk for the housing sector is likely to increase, given the rising apprehensions on overall economic growth and contagion-related fears. "This in turn will lead to reduced walk-ins and inabilities to carry out site visits, thus resulting in some decline in new sales and the associated collections."
“Committed collections receivable from already booked sales may also get impacted to some extent, given that milestone based payments may get deferred and some buyers may delay payments on account of economic uncertainties arising from the looming possibility of job cuts and pay cuts as the crisis extends,” she explained.
The robustness of digital banking systems will also be a key determinant in keeping cash inflows of housing loan funded projects uninterrupted.
Projects catering to the business, NRI and investment communities, where house purchases tend to be largely self-funded, may witness a more significant disruption in collections, given the overall impact of the coronavirus outbreak on business activity and investment decisions. Developer ability to remotely issue and follow up on demand notices will also have a significant bearing on collection efficiency levels, the report said.
On the whole, ICRA expects net cash flows of residential developers to witness some decline on account of the coronavirus outbreak, although the extent of moderation will largely be determined by the duration of the disruption, as well as developer ability to sustain collections from committed receivables and limit project outflows.