Credit quality of realtors will worsen: India Ratings

India Ratings and Research said the credit metrics of the real estate sector will continue to deteriorate in FY15, as high residential prices continue to impact sales, even as rising bank credit to the sector indicates an increase in inventory.

The rating agency maintains a negative to stable outlook on the real estate sector for FY15 on the back of continued weak end-user demand and adverse consumer sentiments.

Real estate companies have been facing falling unit sales, flat revenue, operating profit margins and continued deterioration in credit metrics and cash flows, it said.

India Ratings said the sale of fresh residential units (in square feet) by listed real estate companies has seen a downward trend in the first half of FY14. However, bank credit to the sector saw strong double-digit year-on-year growth in 2013, which indicates build-up of inventories.

But prices continue to remain high despite the weak end-user demand, as demand from investors and speculators could have risen following the Centre’s efforts to curtail gold imports. The upward movement seen in National Housing Bank’s house price index in 2QFY14 after a fall in the previous two quarters supports this argument, as it coincides with the imposition of import duty on gold, it said.

The agency expects subdued demand for commercial property to persist in 2014, due to the continued slow economic growth which will impact fresh hiring in most sectors. Demand for retail space is also likely to remain muted in FY15, as retail companies continue to optimise their store portfolios.

The real estate sector has seen strong interest from private equity and foreign investors. During 2013, strong investor interest was seen in rent-yielding commercial properties following the conclusion of several large transactions by leading private equity players, such as Blackstone.