With the COVID-19 pandemic crushing economic activity and with it, big-ticket spending, it is survival of the fittest with small to mid-sized developers staring at a huge funding gap. The already languishing residential real estate demand is expected to plunge 50-70 percent on-year in the current fiscal, a report has said.
As a result, the credit profiles of small-to-mid-sized and leveraged developers will be impacted than larger, experienced developers with healthy balance sheets, CRISIL said.
With demand going down, capital values will remain under pressure across cities. CRISIL expects a price correction of 5-15 percent across ticket sizes.
Demand for the sector has been subdued over the past decade, on account of a raft of factors: demonetisation, unaffordability, delay in completions etc. While income and employment generation remain monitorable, a mild recovery in residential demand might be expected in the second half of the current fiscal, in the baseline case.
“Lowering capital values and attractive interest rates augur well for affordability which has improved by 10-30 percent across cities during the past five years- as measured by CRISIL’s proprietary index MAHTI. Despite improved affordability, demand translation will be feeble led by income uncertainty arising from pandemic coupled with weak investor sentiment emanating from pressure on capital appreciation / rental yields in the sector over the past few years,” says Isha Chaudhary, Director, CRISIL Research.
While demand for new units will see a sharp decline, the blow to customer collections will be cushioned by advances against already sold inventory realised in line with construction progress.
The one-time relief for Real Estate Regulatory Authority (RERA)-registered projects would provide players an option to manage outflows through flexibility to delay construction spend. Postponing capex and land banking plans could be another way, it said.
Funding requirements to increase; larger players to manage better
However, overall funding requirements are expected to rise as the hit in collections is expected to be far steeper than the decline in outflows due to deferred construction.
That said, large diversified players with strong delivery track record are expected to manage better as indicated by an analysis of the top 10 CRISIL-rated developer groups.
“Larger, established developers have ample financial flexibility, with debt-to-total assets ratio (a measure of leverage) estimated at a five-year low of around 30 percent as of end-fiscal 2020. Many will also have access to steady income from operational commercial assets. We estimate the increase in funding requirements for these players at only 15-25 percent higher than pre-pandemic estimates,” says Sushmita Majumdar, Director, CRISIL Ratings.
Small developers to feel the pinch
The situation, however, is far bleaker for developers on the other side of the spectrum, as per CRISIL’s analysis of more than 100 small developers and single-project special purpose vehicles.
Small-to-mid-sized developers will face a sharp 200 percent rise in funding gap this fiscal. But their ability to borrow or raise capital is limited as debt-to-total assets ratio is significantly high at around 75 percent as of March 2020.
Interest cover is also weak, at 1.2-1.5 times versus around 2.0 times for the large developer groups.
Tie-ups with larger players imminent
Given tight liquidity, some of these players will be vying for tie-ups with larger established names by way of joint ventures, joint development agreements, and development models to benefit from their processes and financial flexibility, or resort to distress sale of assets to raise funds.