Recovery of residential sector may take longer: Icra


BENGALURU: Residential sales across the top eight cities neared 85 million sq ft in the March quarter, and many listed developers recording high performance, rating agency Icra said on Monday.

Brigade Enterprises Ltd and Godrej Properties Ltd declared all-time high residential sales and collections during the quarter. This came after the sector witnessed a sharp demand crash in the January-March period in 2020, triggered by covid-19. Pan-India quarterly average home sales in 2018-19 and 2019-20 stood at 84 million sq ft and 81.5 million sq ft respectively.

While policy rollouts in the form of RERA and GST along with developer focus on deliveries were a positive, the onset of the liquidity crisis impacted sales in 2019-2020 and covid-19 served as a double whammy thereafter.

However, recovery post the first wave was quick, with the increased importance of home-ownership after the start of the pandemic serving as a fundamental growth driver, given the extended period of work-from-home and the consequent requirement for bigger homes, Icra said.

Mahi Agarwal, sector head and assistant vice-president, ICRA, said, “Potential home-buyers, fence-sitters and home-renters increasingly took the plunge towards home-ownership, with the improvement in affordability over the past year further supporting their decision. The low home-loan rates, together with attractive discounts/payment schemes, resulted in improved affordability. Stamp duty reductions in Maharashtra and Karnataka (for units priced up to 35 lakh) also stimulated house purchases.”

However, the second wave of the pandemic is impacting housing sales again.

As per market reports, housing sales declined by 40-50% in April 2021, thereby de-railing the strong demand recovery witnessed post the first wave.

Some of the key demand drivers that supported the recovery in the second half of 2020-21 remain in place, including low home loan rates and income tax sops, particularly for affordable housing, and these are expected to support recovery going forward.

However, the stamp duty reduction effected in Maharashtra has expired. Other cities such as Hyderabad and Chennai also recorded a fast pace of recovery, on the back of continued commercial real estate activity, which in turn, supported residential demand, and a high proportion of lower-ticket-size housing.

Reinstatement of stamp duty measures in Maharashtra, extension of the same by other states, and developer focus on right-pricing and inventory liquidation would support a quicker recovery in sales once the initial impact of the second wave recedes, the report said.

The supply-side will also need more support, especially for the smaller developers, who make up around 80% of the market. Developers will need adequate liquidity and refinancing flexibility to tide over the disruption in cash flows and meet debt obligations, at least till demand recovers. During the first wave, the moratorium on debt servicing had aided in the conservation of liquidity, particularly for those developers with maturing debt obligations.

Extension on RERA timelines by six to nine months provided additional flexibility to defer outflows in case of weakness in collections. Certain states also reduced approval costs or construction premiums etc. for developers for a limited period.

However, no such measures have been extended post the onset of the second wave, thereby creating an increasingly challenging operating and financing environment for developers.

While the larger, organized players have maintained considerable liquidity buffers, and have low levels of leverage, together with high financial flexibility, smaller players would find it difficult to cope with the prevailing market conditions.

“While fundamental demand drivers have strengthened, continued support measures, both on the demand and the supply side, would serve as key enablers towards a timely recovery in the residential realty industry. In the absence of additional measures, the recovery period may get elongated, thereby placing higher stress on developer cash flows, especially for the smaller ones who have built-up unsustainable debt levels on account of slow-moving inventory or high investment in land assets,” Agarwal added.

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