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Housing demand momentum to continue despite rising prices and interest rates: CRISIL

CRISIL believes that strong demand, lower inventory levels and strengthened capital structures auger well for the industry. However, any aggressive debt-funded growth in the industry will have to be monitored closely over the medium term.

Representational image.

Representational image.

Housing demand momentum across India’s top six cities is expected to continue this fiscal as it grows 5-10 percent on favourable demographics and urbanisation, defying rising property prices, interest rates and a high base, an analysis by CRISIL has shown.

The leverage and credit profiles of real estate developers, which had strengthened on the back of a recovery in fiscal 2022, should sustain over the medium term. CRISIL estimates demand rose a solid 33-38 percent last fiscal, surpassing pre-virus levels. But this was on a low base of fiscal 2021, when demand had fallen 20-25 percent.

Affordability, after improving up to 20 percent between fiscals 2016 and 2021, had started declining from the second half of fiscal 2022. Headwinds now are higher capital values and interest rates, reinstatement of stamp duty, and the high base effect of fiscal 2021, CRISIL Research’s proprietary MAHTI Index indicates.

Inventory levels in majority of the top six cities are at a comfortable 2-4 years as against 3-5.5 years before the pandemic. The correction happened because of fewer launches in the past two years owing to the pandemic and slower sales momentum, it said.

Although new launches are expected to catch up, healthy demand will keep the inventory levels in check over the medium term largely driven by established developers.

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These realtors will continue to gain market share, cornering 24-25 percent of the spoils by March 2022, compared with around 18 percent at the start of the pandemic. In fiscal 2021, their sales grew 13 percent while the industry contracted 20-25 percent; in fiscal 2022, sales of these developers are estimated to have grown 35-40 percent in line with the industry.

“Established developers now have stronger balance sheets, reflected in a comfortable debt-to-total assets ratio of around 25 percent last fiscal versus more than 40 percent at the start of the pandemic. They are also well-placed in terms of liquidity, having raised around Rs 13,000 crore through equity and monetisation of land and commercial assets in the past two fiscals. Their improved financials will come in handy to fund growth and keep credit profiles stable,” said Kshitij Jain, associate director at CRISIL Ratings.

Small and mid-sized developers, too, are seeing better days. Their balance sheets have improved with their debt-to-total assets ratio falling below 50 percent in fiscal 2022 from 55-60 percent before the pandemic.

However, these players have higher dependence on debt and may need to tie up with established players for new launches.

CRISIL believes that strong demand, lower inventory levels and strengthened capital structures auger well for the industry. However, any aggressive debt-funded growth in the industry will have to be monitored closely over the medium term.

 
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first published: May 10, 2022 01:02 pm
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