Developer community to support workers
Revising the outlook for the real estate sector in 2017 to negative from stable, Fitch Ratings has warned that residential property sales of most developers are expected to weaken by at least 20% to 30% in 2017 following the government’s demonetisation move to curtail undeclared wealth and this is likely to take a toll on demand. Slower sales means less cash collection that will impact construction timelines, the agency says in its latest report.
Property and gold are popular instruments for investing undeclared income in India’s large cash-based economy. The demonetisation comes at a time when property demand in India had slowed due to rising unsold inventory and high prices.
“We expect the credit profiles of most homebuilders to weaken as slower sales could mean cash collections will lag construction commitments. This would be particularly true for companies that have aggressively expanded their land banks in the last two years, using cash collections from previously sold properties.
On the other hand, companies that have liquidity to complete their projects within the next three to six months may be temporarily insulated from the shock.
We expect leverage (defined as net debt/adjusted inventory) of the seven large homebuilders considered in this report to increase in 2017, from around 87% i n end of March 2016 ( FYE16) and 82% at FYE15. Aggregate sales of these seven companies fell by 3% to Rs 236.5 billion during the financial year 2016,” it says.
Seven large developers considered for the report include Lodha Developers, DLF, Prestige Estates, IndiabullsReal Estate, Godrej Properties, Sobha and Unitech.
The report also expects unsold inventory to increase in 2017 as a result of weak demand, particularly in the National Capital Region (NCR) – which is believed to have the most significant cash-based economy. Industry data shows that the NCR had the highest unsold inventory – of around 16 quarters of sales as of June 2016 – while unsold inventory in Mumbai and Chennai was lower at around 10 and seven quarters of sales, respectively. The decline is likely to be more pronounced on sales of higherend, premium property. Credai, the consortium of developers across the country has announced a relief programme for its workers following demonetisation. It is collaborating with its developer network all across India for providing daily meals to all their workers at their construction sites as well as ensuring that basic amenities such as grains, vegetables and access to banks are also provided on location. Under this initiative, the Credai member community is feeding more than 5,000 workers across the country.
This activity is being conducted across Delhi-NCR, Mumbai, Kerala. “Construction workers form the backbone of the real estate and construction sector. In this challenging time, we felt that it is our responsibility to support them. The economy is going through game changing policy reforms which will increase transparency, reduce home loan rates and will act as a catalyst in the revival of the entire industry. Through this we at Credai are playing our part by ensuring that our entire workforce doesn’t lack the basic needs such as food. And we have endeavoured to make this possible through the participation of our entire 11,500 members across the country,” says Getamber Anand, president, Credai. The total demand for urban housing is estimated at 42 lakh units during 2016 to 2020 across top eight Indian cities, says a report by Cushman & Wakefield and GRI entitled Revitalising Indian Real Estate: A new era of growth and investment.
Existing under-construction and planned supply of 10 lakh housing units by private developers is also expected to be delivered across top eight cities during the period. Delhi-NCR (NCT, Ghaziabad, Faridabad, Gurgaon and Noida) continues to garner the highest proportion of demand (24%) at around 10 lakh units by the end of 2020.
Lower income group or LIG ( below ₹ 15 lakh) is the most under-serviced segment. While the demand generated here is likely to be about 19.8 lakh units by 2020, supply by private developers will be limited to barely 25,000 units. Similarly, though the middle income group or MIG (₹15-70 lakh) accounts for 63% of the total housing supply across eight cities between 2016 and 2020 at 647,000 units, the demand is estimated to be a much higher 1,457,000 units.
“At the ground level, despite demand grossly outstripping supply, there is a considerable proportion of unsold inventory in the MIG and HIG categories, which are not absorbed as these properties are unable to demonstrate value for their buyers. Such units fall out of preference either on account of higher-than-expected prices or due to locations. Lack of funds and high land and development costs are the primary reasons for developers not opting for smaller sized units closer to city centres as profitability drastically reduces. Despite encouragement from the government through taxation and funding relief, under the Housing for All 2022 vision, top cities of India have not seen a significant shift in supply for reduced sized apartments within the MIG or LIG. Further, with the recent move to demonetise large curren- cies in order to crack down on black money, the demand for HIG and luxury housing could temper further. This is expected to propel developers to recalibrate their plans to suit the high demand segments of affordable housing.” says Anshul Jain, managing director, India, Cushman & Wakefield.
“To be able to utilise the opportunity of the shortfall in supply to demand, private developers will need to change their approach and bring in better strategies, systems, technology and funding options. Some inter national development companies are actively scouting the various local markets to identify the right opportunities for themselves,” he says.