Fitch predicts negative growth for Indian real estate for 2H12

Fitch Ratings in its latest report said that the 'Rating Outlook' for the Indian real estate sector continues to be negative for second half of 2012 due to persistent sluggish demand, high construction costs and liquidity pressures.

Given Reserve Bank of India's caution on interest rate cuts, high equated monthly instalments (EMIs) will continue to be a deterrent for potential home buyers. This, together with high property prices and elevated inflation will keep demand sluggish. However, y-o-y growth of home loans by banks - which had been slowing for the 12 months to April 2012 - picked up markedly in May and June 2012, and if continued may help spur the sector.

Slowdown in the economy and subdued job growth in the IT sector, which was at its lowest quarterly level in Q212, will hold back demand for commercial and retail properties.

Real estate companies will continue to face margin compression from high construction costs for both building materials and labour. From December 2011 to April 2012 the price of steel increased 13% and that of cement by 12%. Notwithstanding the trend of deleveraging since Q311, slowing demand, high costs and thus declining profits will keep leverage high for most real estate companies.

Reliance of real estate companies on operating cash flow will assume significance in the near term as available funding options remain limited. Growth of bank lending to the commercial real estate sector was low at 1.5% y-o-y in June 2012. Except for some pick-up in private equity, other funding options are restricted. As a result, companies that derive significant revenue from lease rentals will have a more stable credit profile compared with their counterparts whose business model is based on outright sale.

Fitch predicts negative growth for Indian realty market in 2012

NEW DELHI: More negative news for the Indian realty market which is already affected by several macro-economic factors. Fitch, an international rating agency, has projected a ‘negative outlook’ for the Indian real estate sector in 2012 due to weak overall demand and higher construction costs, which are likely to continue to squeeze margins in 2012.

The ratings firm has pointed out that high interest rates as well as high home prices have reduced the affordability for home buyers.

For real estate companies, both material and labour costs have increased in 2011 and home sales, which had improved in the first quarter of 2011, have moderated significantly since and are likely to continue at lower levels in the first quarter of 2012 as well, reports Economic Times quoting Fitch report.

In the commercial office segment, oversupply of space continues in some markets. "However, the demand for office space is likely to be maintained at 2011 levels as the hiring momentum of the IT/ITeS sector, the major driver of office space in India, continues in 2012," says Fitch. The demand for retail commercial space, however, is expected to be low in 2012.

Declining profits for real estate companies has resulted in high debt levels for companies, and this is expected to continue in 2012, negatively impacting the creditworthiness of real estate companies. Going forward, the dependence on operational cash flows to fund growth and service debt is likely to increase. Fund raising options for real estate companies are limited due to the cautious approach of banks, weak equity markets and dwindling investment by private equity funds.

Improved macro-economic conditions leading to improved demand would have the potential to improve cash flows to real estate companies and see the outlook revised to stable. Also, the ability to judiciously use cash from liquidating existing inventories, which would improve capital structures, may result in the selective upgrades of companies in the real estate sector, even while the overall outlook is negative.