While the overall debt exposure to the real estate sector has witnessed a 38 percent increase since the financial year 2017, the debt levels for major listed realty players declined by 25 percent over the same period, according to a report by ICRA.
The report highlighted that major listed realty players have remained cautious on debt levels. The focus of these developers on creation of capital through inventory liquidation and capital market equity transactions, instead of raising debt, has supported this trend in de-leveraging.
Godrej Properties Limited and DLF have raised funds to the tune of around Rs. 15,000 crore through capital market equity transactions since March 2017, the report said.
Inventory liquidation has been supported by the robust sales levels for such players, with the area sold for the companies in ICRA's sample set standing at 14.55 million square feet (mn sq ft) during the first half of the financial year 2020, it noted.
The year-on-year growth in sales volumes, albeit lower than the high levels witnessed over the past two years, remained healthy at 12 percent, despite prevailing headwinds in the form of continued funding challenges on the back of the NBFC slow down, and overall weakness in demand.
The pace of execution also remained strong during the period, with launches of 7.35 mn sq ft and deliveries of 14.49 mn sq ft, notwithstanding the year-on-year decline in deliveries, it said.
Assuming an average project life cycle of three years, the slowdown in deliveries may be largely attributed to the reduction in launches in the financial year 2017, given the uncertainties relating to RERA and GST implementation during the year. Going forward, delivery momentum is expected to rise, in line with increased launches from the financial year 2018 onwards.
"The ability of the larger realty players to substantially fund committed construction costs through internal accruals has permitted them to keep debt at sustainable levels. Further, listed players, with a good operational track record and sound financial discipline have been able to raise equity from the capital market, which has also aided them in reducing overall leverage levels. The ensuing strength of the balance sheet of such developers, together with healthy sales momentum, supported by buyer preference for completed inventory from recognized developers, has enabled them to maintain a steady execution pace and resulted in significant gains in their market shares," said Shubham Jain, Senior Vice-President and Group Head at ICRA.
However, the overall high debt exposure of the sector remains alarming. Several projects by smaller/less-established developers are already stressed and have negative cash flows, which are expected to lead to pressures on debt servicing going forward.
"While some of the supply-side/delivery-related concerns may be alleviated post the creation of the Rs 25,000 crore fund for stalled housing projects, demand risks on the high levels of unsold inventory remain. Although some improvement may be expected in demand levels, given the favorable government initiatives like reduction in interest rates and increased tax deductions announced on home loan interest payments for affordable housing units, a substantial and sustained increase in housing demand will remain critical for enabling recovery of the sector as a whole," added Jain.
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