Real Estate

Covid-19 to worsen woes of residential real estate sector, says ICRA

Our Bureau Hyderabad | Updated on March 27, 2020

Extent of impact will be determined by duration of disruption

The coronavirus outbreak is expected to further exacerbate the weakness in the country’s real estate sector, with sales and collections expected to witness some moderation, according to rating firm ICRA.

The residential real estate sector has already been reeling from the adverse impact of the prevailing liquidity crunch, a high inventory overhang, weak affordability and subdued demand conditions.

Reduced construction outflows, attributable to a slowdown in project execution activity, are expected to limit the overall decline in net cash flows, at least in the case of a short-term disruption. The three-month moratorium on term loan instalments announced by the RBI today also provides comfort on overall developer cash flows during this period.

In case of a longer outbreak, though, the impact on overall economic activity is likely to be deeper and more sustained. This would, in turn, result in a more significant impact on developer cash flows and project execution abilities, giving rise to wider credit negative implications.

Well-diversified developers with strong balance sheets and adequate liquidity are expected to be better-positioned to manage the risks arising out of this event, including reductions in collections and disruptions in project execution.

Impact of economic uncertainties

Mahi Agarwal, Assistant Vice-President and Associate Head at ICRA, in a statement said, “Demand risks for the housing sector are likely to increase, given the rising apprehensions on overall economic growth and contagion-related fears leading to reduced walk-ins and inabilities to carry out site visits, thus resulting in some decline in new sales and the associated collections.”

Committed collections receivable from already booked sales may also get impacted to some extent, given that milestone-based payments may get deferred and some buyers may delay payments on account of economic uncertainties arising from the looming possibility of job cuts and pay cuts as the crisis extends.

Developer ability to remotely issue and follow up on demand notices will also have a significant bearing on collection-efficiency levels.

Moderations witnessed in project inflows are, however, likely to get offset to some extent by lower spend on project execution outflows. Reduced labour force presence and raw material supply chain disruptions attributable to lock-downs on non-essential services and contagion fears are expected to result in some slowdown in construction activity. Cost savings are also likely on account of the prevailing decline in commodity prices, thus leading to some trimming in outflows.

ICRA expects the net cash flows of residential developers to witness some decline on account of the coronavirus outbreak, although the extent of moderation will largely be determined by the duration of the disruption, as well as developer ability to sustain collections from committed receivables and limit project outflows.

The three-month moratorium announced by the RBI on term loan instalments provides comfort on overall developer cash flows.

Published on March 27, 2020

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