Signs of improvement visible in real estate: India Ratings

India Ratings has revised its outlook for the Indian real estate sector to ‘negative to stable’ for 2013, from negative in 2012.

The rating agency sees signs of improvement in terms of stability of margins and the easing of liquidity pressures, with free cash flows turning positive since the second half of 2012.

According to the report, in financial year 2011-12, companies generated positive free cash flows and the trend continued into the first half of 2012-13. “Apart from stable demand, other efforts to improve liquidity included strategies like monetization of land and non-core assets, exercising prudence in new launches and adopting the JV route to developing projects,” India ratings, which is part of the international ratings agency Fitch Group, said in a report. Also, EBITDA margins, which steadily declined to 30% in 2012 from about 55% in 2008, stabilized at that level during 2012. “That this was possible despite increases in construction costs, signals a potential return of stability,” the report said.

However, demand remains subdued and EBITDA margins low, leading to weak credit metrics for companies in the sector, India Ratings said.
According to India Ratings, demand for residential real estate stabilized in 2012, with banks’ exposure to home loans growing by about 17.4% in November 2012 compared with the previous year. However, exposure to the commercial real estate sector increased by just 1.7%, during the first 11 months of 2012.

Also, according to the report, the sales of large players declined marginally in 2012. “Economic weakness continued with the associated apprehension of employee downsizing and salary freezes, which adversely affected consumer sentiments,” the company said in the report.
High inflation and high interest rates continue to reduce affordability, and high property prices will continue to hinder improvement in demand, according to the report. “Commercial demand will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 has been around 28%-32% lower than in the previous two years. Demand for retail space is likely to be muted in the near term,” the report said.

With funding options limited, the key to sustainability for real estate companies is growth in sales, India Ratings said. Private equity inflow, too, into the sector has been moderate. “The limited funding options imply a continuance of dependence on operational cash flows for funding growth and debt servicing,” the agency said in the report.