JOIN USReal estate demand to fall 10-15% in FY21 if lockdowns last for 3 months
Real estate sector, which contributes nearly 6 per cent to the GDP, is likely to witness a 10-15 per cent fall in demand across the top six cities next financial year if the coronavirus-led lockdowns last up to next two-three months, India Ratings said.
According to the rating agency, the overall residential demand across top six cities would fall by 7-10 per cent in 2019-20.
The demand was negative 4 per cent in the first nine months of FY2020 as compared to the corresponding period last fiscal.
"The residential demand across these top six cities is expected to fall by 10-15 per cent in FY2021 as against FY2020 in the event the coronavirus-led lockdowns and other social distancing measures last up to next two-three months," the agency said.
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, it said.
India Ratings further noted that the affordable segment (ticket size up to Rs 50 lakh) constituted approximately 35 per cent of the total sales by value during April-December FY20, but in terms of volume, it witnessed the sharpest decline of around 10 per cent, corroborating with the slowing economy and manufacturing pace.
"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," it said.
The agency further noted that the overall quarter-to-sell inventory may remain stable at 14-15 quarters in FY2020 and FY2021, supported by limited launches or deferment of launches due to the lockdown-led construction halt as well as exacerbated funding challenges for the sector.
"Grade-I players' sales growth, although positive, moderated to about 6.3 per cent in 9MFY20 as compared to 28 per cent in 9MFY19 and is likely to fall by about 10 per cent on a full-year basis in FY20, partly due to the high base effect," the agency noted.
It further stated that liquidity and funding challenges are likely to increase for the residential sector.
"The overall residential sector has been generating negative cash flows from operations (apart from 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 or overdraft limits or on-balance sheet liquidity or support from a stronger rated parent with diversified operations," it said.
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, it said.
"However, the cash flow gap would have to be assessed for each player individually, depending upon their sales mix from completed or under construction projects, balance construction cost to be spent for under construction projects and debt structure," it said.
"Furthermore, 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," it added.