JOIN USDemand for housing units may fall up to 15% in FY21
The enforcement of the nationwide lockdown following the spread of Covid-19 is causing a huge loss across multiple sectors of the industry and economy. The real estate sector is no different, with the residential housing sector set to witness one of its worst scenarios in terms of drop in demand.
The demand for housing is likely to fall by 7-10% in FY20 and 10-15% in FY21, across the top six cities in the country, if the coronavirus lockdown and/ or other social distancing measures last up to next two-three months.
In case the outbreak lasts longer, residential demand, which closely tracks economic growth rate, could take a further hit on account of the economic fallout from the pandemic, according to research by India Ratings & Research (Ind-Ra).
However, the quarter-to-sell inventory may remain stable at 14-15 quarters in FY20 and FY21, supported by limited launches and/ or deferment of launches due to the lockdown-led construction halt as well as exacerbated funding challenges for the sector. Ind-Ra notes that Grade-I players’ sales growth, although positive, moderated to about 6.3% in nine months of FY20 compared to 28% in the corresponding period of the previous year and is likely to fall by about 10% on a full-year basis in FY20, partly due to the high base effect.
Liquidity challenges
The overall residential sector has been generating negative cash flows from operations (save Grade-I players) for the past couple of years, leading to higher leverage and increased refinancing risk. with limited sales in the next few months, cash flow gaps could widen and debt servicing could be a challenge, especially for players with negligible new project funding lines/ overdraft limits and/ or on-balance sheet liquidity and support from a stronger rated parent with diversified operations.
“There is a likelihood that collections for Grade-I players could bounce back in the remainder of FY21, post few initial months of cash flow gaps, given their preceding two years sales momentum,” the report said.
However, the cash flow gap would have to be assessed for each player individually, depending upon their sales mix from completed/under-construction projects, balance construction cost to be spent for under-construction projects and debt structure.
“Further, given the impending economic slowdown and job losses, if housing finance companies, as well as banks, were to tighten their home loan disbursements criteria, sales/collections could see a further pressure especially in the affordable segment, where many players have forayed recently,” Harsha Sodhani, senior analyst, India Ratings & Research said.
Recovery to take longer
The affordable segment (ticket size up to Rs 50 lakh) constituted approximately 35% of the total sales by value during nine months of FY20. However, this segment witnessed the sharpest decline in the sales volume in nine months of FY20 of around 10%, corroborating with the slowing economy and manufacturing pace. Compared with the customers of other ticket size segment, those of the affordable segment are more price-sensitive and responsive to the changes in the macroeconomy.
Ind-Ra believes the decline in the affordable housing segment could be more than the rest and likewise, the recovery also would take longer than that in the mid ticket or higher ticket segments. However, any government policy intervention and relief measures, if announced for the affordable segment, then the recovery could be more transient.