[ecis2016.org] According to India Ratings, market consolidation is likely to gather pace in the residential real estate segment, in the second half of FY 2021
Chances of any quick recovery in India’s highly stressed residential real estate segment are highly unlikely, according to rating agency India Ratings and Research (Ind-Ra), which has maintained a negative outlook for the sector in the second half of the current financial year (FY 2021).
Projections by the rating agency indicate housing sales during the year are expected to decline by 40% year-on-year, on account of the Coronavirus-led economic slowdown that has battered almost all sectors, real estate included. The much-talked about affordable housing segment, India Ratings adds, will be the worst affected in the process of a much-slower-than-expected recovery in residential real estate in the country.
Liquidity pangs to increase amid low sales volumes
Existing under-construction and ready projects have piled up, on account of the low base of sales in the lockdown period, leading to an all-time high of 36 quarters to sales, the agency said, adding that sales could rationalise by the end of FY 2021.
Data available with ecis2016.org show real estate developers had an unsold stock consisting of over 7.38 lakh housing units across the country’s nine major markets as on June 30, 2020. At the current sales velocity, builders will take 35 months to sell this stock. According to India Ratings, a continued slowdown in GDP could impact the purchasing power of buyers and consumer sentiment about job security, resulting in muted sales velocity for developers and thus, lower cash flows available for debt servicing. The residential sector accounts for over 10% of GDP, the report adds.
Outlook stable for Grade-A players
As the effect of the slowdown is likely to be limited on grade-A players, because of the resilience they have shown in these adverse circumstances, India Ratings has maintained a stable outlook for rated companies in the second half (October-March) of FY 2021.
Even though the residential segment is confronted with a moderate risk, with respect to liquidity in the near term, the rating agency does not expect the large rated developers in India to opt for loan restructuring.
While stating that grade-A players in fact continued to report healthy and stable margins of 27% in FY20, supported by a pick-up in sales, the agency says ‘strong parentage will continue to have better access to capital markets’ even though sources of funds are drying up for small to medium players in the residential segment.
The agency also notes that around 27% of the rated large players, with revenue of above Rs 7.5 billion, availed of the debt moratoriums during March-August 2020 to preserve their liquidity profiles.
Outlook revised to negative for commercial realty
For H2, the rating agency has also revised the outlook for the commercial real estate segment from stable to negative. Providers of retail space are expected to be the worst hit and will see 30%-40% yoy decline in rent collection in FY 2021. Firms with a large under-construction portfolio in both, the office and retail spaces, will also struggle to lease/sell them amid the prevailing adverse economic environment.
However, the agency expects the owners of mature, leased out, Grade-A office space to not face any serious issues in rent collection or in retaining their existing lessees, ‘given the long remaining lease periods with generally financially strong lessees’. Most Grade-A office space providers have reported above 95% collection efficiency and few lease cancellations over the six months ending in August 2020, it says.
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Negative outlook for the construction sector
India Ratings has maintained a negative outlook for the construction sector for H2 FY 2021 while stating that the overall revenue of the companies operating in the engineering procurement and construction sector would decline by around 50% y-o-y in Q1 FY 2021. The agency says the recovery to the pre-COVID-19 levels would happen only by Q3 FY 2021 in this segment.
However, the outlook will still remain stable for the entities which have exposure towards the central government and related bodies, on account of the orders received in H1 FY 2021, it said.
Outlook for construction sector in FY19 stable: India Ratings
India Ratings and Research has maintained a stable outlook on the construction sector for financial year 2018-19, on accelerated revenue growth due to increased spending by the centre
March 1, 2018: Rating agency India Ratings and Research, has maintained a stable outlook for the construction sector, for 2018-19, adding that a further improvement in the rating can be expected during the next fiscal, as companies continue to record higher EBITDA (earnings before interest, tax, depreciation and amortisation) and generate free cash flow.
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Giving a sector view, India Ratings noted that order inflows may continue to improve in the next fiscal, driven by higher orders from the transportation segment, led by an increase in engineering, procurement and construction contracts for roads, as well as urban infrastructure projects.
The agency expects revenue and EBITDA margins for the sector to continue to grow and cash flows to remain positive in fiscal 2018-19, barring the blip in fiscal 2017-18, due to the transitional impact of the implementation of the Goods and Services Tax (GST).
“Capex of construction companies is likely to increase as asset utilisation peaks and technical specification for contracts change,” it said. Accordingly, the agency has ‘maintained a stable outlook on the construction sector for 2018-19, underpinned by accelerated revenue growth due to increased spending by the government’.
“Credit profile of some of the issuers is at the higher end of the rating level, reflecting sufficient headroom to maintain the rating through the cycle,” it added.
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