Real estate developers, mostly in the listed space, are gradually reducing their debt burden. On an aggregate basis, top 10 listed developers in India have been able to cut their consolidated net debt levels by 37% to ₹27400 crore between March 2020 to June 2021, According to ICICI Securities.
This has been achieved through a combination of reduction in cost of debt by 80-160 basis points (bps), reduction in corporate overheads by 20-40% from pre-covid levels, operating cash surpluses, asset sales and equity capital raises either through the QIP route or through dilution at the special purpose vehicle (SPV) level, Adhidev Chattopadhyay, analyst, ICICI Securities said.
“While the overall real estate sector in India, especially the unlisted space, continues to grapple with high cost and quantum of debt, listed developers’ balance sheets have become leaner and puts them in a strong position to invest for growth in the medium term and is likely to accelerate the pace of consolidation in the sector,” he added.
Favourable factors such as healthy balance sheets, access to capital and many unlisted, weaker developers being shunted out of the market, the market share of large organized developers is set to grow further in the next two-three years, according to the brokerage firm.
Most developers in the listed space have aggressive launch plans from second half of FY22 onwards and are looking to grow at a double-digit sales value CAGR over the next two-three years which will lead to market share gains assuming that industry size remains stagnant.
After a slump in real estate stocks, the sector is regaining strength with the BSE Realty index rising nearly 25% last week. Recovery in economy, declining covid cases and residential launches in the festive season are expected to keep the sector attractive, said analysts. Low interest rates on home loans also aided sentiment for real estate demand. While initial expectations were for residential launches to commence from October to coincide with the beginning of the festive season, the waning of the second covid wave, record low mortgage rates and strong hiring/salary growth in the IT/ITes sector has led to developers advancing many launches to August-September which have seen strong buyer demand, said ICICI Securities.
Chattopadhyay expects momentum in real estate to be carried forward into third quarter of FY22 (festivals of Dusshera and Diwali) and estimates developers to post record sales booking numbers in second half of FY22 led by launches. He sees pan-Indian residential market share for companies under the brokerage firm’s coverage growing from 25% in FY21 to 29% in FY24.
Heading into the festive season in India in second half of FY22, listed developers have lined up a number of launches across tier I cities. Low mortgage rates, stable property prices and robust hiring outlook for IT/ITeS and financial services, especially in South India and continued work-from-home is expected to support residential housing demand.
Based on channel checks by ICICI Securities and commentary from developers in our coverage universe, most launches in September have seen strong customer response with developers keeping pricing discipline with price hikes of 4-5% on a like-to-like basis in new phases of ongoing projects and record low mortgage rates of 6.5-6.7% for housing loans.
Affordability of residential homes are also getting attractive due to low mortgage rates and stable prices. Mortgage rates offered by most large lenders range in the 6.5-7.0% range for 20-year housing loans and is the lowest ever historically since 2005. “Even assuming that mortgage rates may inch up over H2FY22-23E, we believe that mortgage rates of 7.5- 8.0% (assuming 100bps increase) are still affordable and would not significantly dent buying decisions,” Chattopadhyay added.
Others concur. Sharad Agrawal, Executive Director – Capital Markets, Knight Frank India agrees that thetop tier developers have used the pandemic period to consolidate their hold on the market through gain in market share, while the tier 2/3 players continue to face liquidity challenges, stuck projects and weaker sales and collections.
“The larger players have also reduced their debt over this period and have brought down their cost of borrowings as well, positioning themselves to take advantage of the post-covid rebound in demand. Developers have brought down their debt by equity raises, asset sales, stake dilution and reduction in corporate overheads. They are now well positioned to invest in growth and gain market share. The housing cycle seems to have turned with residential demand coming back strongly in the market on the back of strong hiring by the tech companies, steady reduction in unsold inventory, record low home loan rates and government support,” Agrawal said.
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