Credit metrics of realty firms to worsen, says India Ratings

Sanjeev Sharma

Tribune News Service

New Delhi, January 27

India Ratings & Research has maintained a negative to stable outlook on the real estate sector for financial year 2016 and believes the credit metrics of realty companies will continue to deteriorate in the year, as demand will remain subdued amid high property prices, even while inventory is being built-up using bank funding.

The rating agency said the sales of residential units are not likely to recover during FY16. Any improvement in property demand will depend on not only a positive change in consumer expectations of economic growth, job and income prospects but also lower property prices. “Property prices have remained high and unaffordable to end-customers. While economic growth is likely to improve in FY16, property prices might not correct. This could lead to end-customers postponing purchase decisions”, it said.

India Ratings expects demand for both office and retail spaces to pick up during FY16. This is because better economic growth will boost net hiring by IT/ITeS and banking financial services insurance sectors and better customer sentiments will revive the expansion plans of both local and foreign retailers.

The operating profit margins of real estate companies could become stable during FY16, as commodity prices are likely to be under control. However, some margin erosion may be seen due to overheads, if sales do not increase. Margins declined marginally during 2014 due to the companies’ inability to pass on increases in input prices to end-customers and falling sales, leading to under-absorption of overheads.

The interest of investors in the sector remains high, especially in rent-yielding commercial properties. Transactions continue in the residential segment though investors are now using structures such as debt or debt-like hybrid instruments and bulk unit purchases, instead of equity investments to better secure their interests. The use of debt/hybrid instruments is a concern, as it only shifts the funding gap to the redemption date with high funding costs.

The agency said relaxation of thresholds for foreign direct investment in real estate projects is likely to improve fund inflow. The announcement of the guidelines for the introduction of real estate investment trusts and the clarification of tax pass-through status for such vehicles are also positive for the sector, as they improve fund availability to companies owning rent-yielding assets. The passing of the real estate regulation act can also help in improving consumer sentiments in the residential segment.