Moneycontrol PRO

COVID-19 impact: Weak property demand to cause over 15% dip in cement consumption

Fitch expects luxury real estate to see the greatest price moderation but limited price moderation in affordable housing, given the segment’s better demand dynamics and thinner profit margins

Weak property demand and a sluggish construction cycle are expected to cause India's cement consumption to drop by over 15 percent in the financial year ending March 2021. More than 65 percent of domestic cement demand is driven by the housing segment. Steel demand is likely to fall by around 10 percent, supported by a lower hit to demand from other sectors, Fitch Ratings has said.

Fitch expects property developers' operating cash flow to deteriorate on weak demand stemming from low consumer confidence caused by business uncertainty and unemployment concerns, despite falling home-loan interest rates and cuts in transaction costs by some local governments. Lower labour availability and disrupted raw-material supply chains are also leading to construction delays.

The Reserve Bank of India's recent measures, including loan restructuring, moratoriums and relaxed lending limits, provide temporary funding relief to the property sector.

However, the underlying appetite of financial institutions to lend to the sector is likely to remain weak until there is a broader improvement in the sector's operation, with better end-user demand and pricing support, it said.

Fitch expects developers with weak financial profiles or a focus on high-end projects, who are unable to avail the benefits of the Reserve Bank's restructuring scheme, to be most affected, the report titled India's Weak Property Demand to Pressure Cement and Steel Sectors, said.

Narrower capital access will lead such developers to tie up with large and reputable ones with strong financial profiles, creating significant opportunities for consolidation and market share gains for the stronger developers.

Residential developers may also diversify into the more stable commercial-property segment over the medium term to improve their business profiles.

The contraction in pre-sales expected and this is likely to slow the reduction of unsold inventory, which has come down to 450,000 units, from around 700,000 units in 2015. New project launches are also likely to slow as developers look to preserve liquidity and given customers’ preference for completed properties to mitigate execution risk. This could improve the demand/supply balance in the medium term, it said.

Cash collection of property developers is also expected to be under pressure in FY21 due to lower than expected sales and delayed construction-linked receipts.

Residential sales in India’s top-eight cities fell by 54 percent in 1H20, including a more severe 84 percent fall in 2Q20, as pandemic-related lockdown measures inhibited demand due to a lack of property tours by customers and delayed new-project launches, it said.

Construction at ongoing projects was also affected by reverse migration of labour, interruptions to raw material-supply chains and delays in regulatory approvals.

Fitch believes property demand is broad-based across pricing segments, as the uncertain business environment affects the luxury segment and weak consumer confidence impacts the mid-income and affordable-housing segments.

It expects luxury real estate to see the greatest price moderation in light of its discretionary nature and headroom from higher profit margins. Developers in the mid-income and affordable-housing segments may try to spur demand, especially during the upcoming festival season, by offering flexible payment and price protection plans or waiving registration charges, among other incentives.

It sees limited price moderation in affordable housing, given the segment’s better demand dynamics and thinner profit margins, unless the industry outlook worsens considerably.

Developers with weak financial profiles and liquidity would be – either willingly or under pressure from lenders – more inclined to cut prices to speed up inventory sales and generate cash flow than those with stronger profiles. At the same time, sharp price cuts on unsold inventory are likely to be limited, as this would diminish the value of unsold inventory and weaken collateral cover for existing lenders, it said.

The RBI’s Consumer Confidence Survey saw the current situation index record an all-time low in July 2020. Most respondents reported a drop in discretionary spending and do not expect non-essential spending to rise in the coming year.

Fitch expects that a further depletion in households’ financial positions may exacerbate the property-sector slowdown.

Moneycontrol News
first published: Sep 16, 2020 05:41 pm