The momentum in housing demand across India’s top six cities is expected to continue this fiscal and may grow 5-10 percent despite rising property prices, interest rates and a high-base effect, said rating agency CRISIL in a note.
The leverage and credit profiles of real estate developers, which had strengthened on the back of a recovery in fiscal 2022, should sustain over the medium term, the rating agency added.
CRISIL estimates housing demand rose a solid 33-38 percent last fiscal, surpassing pre-Covid-19 levels. But this was on a low base of fiscal 2021 when demand had fallen 20-25 percent.
Affordability, after improving up to 20 percent between fiscal 2016 and 2021, had started declining from the second half of fiscal 2022. The headwinds now are higher capital values and interest rates, reinstatement of stamp duty, and the high-base effect of fiscal 2021, CRISIL Research’s proprietary 'MAHTI Index' indicates.
“We expect residential real estate prices to rise 6-10 percent across the top six cities this fiscal due to a steep rise in material costs and relatively favourable demand-supply dynamics, especially for established developers," said Aniket Dani, Director, CRISIL Research.
"Some of them have started hiking prices by nearly 2 percent per quarter and may continue to do so over the next couple of fiscals to account for rising land prices. However, in spite of these headwinds, housing demand is likely to grow 5-10 percent supported by favourable demographics and urbanisation.”
CRISIL underscored that inventory levels in the majority of the top six cities are at a comfortable two-four years as against three to five-and-a-half-year before the pandemic. The correction happened because of fewer launches in the past two years owing to the pandemic, and slower sales momentum.
Although new launches are expected to catch up, healthy demand will keep the inventory levels in check over the medium term. This will be largely driven by established developers, which will benefit from the sales momentum, the shift in demand to organised players, sound balance sheets, and an asset-light approach.
These realtors will continue to gain market share, cornering 24-25 percent of the spoils by March 2022, compared with nearly 18 percent at the start of the pandemic, said CRISIL.
In fiscal 2021, their sales grew 13 percent, while the industry contracted 20-25 percent; in fiscal 2022, sales of these developers are estimated to have grown 35-40 percent, in line with the industry.
“Established developers now have stronger balance sheets, reflected in a comfortable debt-to-total assets ratio of nearly 25 percent last fiscal versus more than 40 percent at the start of the pandemic. They are also well-placed in terms of liquidity, having raised nearly ₹13,000 crore through both, equity and monetisation of land and commercial assets in the past two fiscals. Their improved financials will come in handy to fund growth and keep credit profiles stable," said Kshitij Jain, Associate Director, CRISIL Ratings.
Small and mid-sized developers, too, are seeing better days. Their balance sheets have improved, with their debt-to-total assets ratio falling below 50 percent in fiscal 2022 from 55-60 percent before the pandemic. However, these players have a higher dependence on debt and may need to tie up with established players for new launches to benefit from the latter’s financial flexibility and strong brand, CRISIL pointed out.
The rating agency believes that strong demand, lower inventory levels and strengthened capital structures auger well for the industry. However, any aggressive debt-funded growth in the industry will bear watching over the medium term.