In year-end report, ICRA maintains ‘negative’ outlook for residential space, ‘stable’ for commercial

Rating agency ICRA, in its year-end assessment of real estate sector, has maintained a negative outlook for residential real estate and a stable outlook for commercial space.

Residential segment

The performance of residential segment continues to be muted due to the prevailing liquidity crunch, high inventory overhang, weak affordability and subdued demand, particularly in markets with large unsold stock, such as Delhi-NCR, Mumbai-MMR and Pune.

With most of the unsold inventory comprising either units with high ticket sizes or units located in peripheral areas with weak network infrastructure, the challenges associated with liquidation of the stock are expected to continue.

On the positive side, sales in the sub-₹50 lakh segment have witnessed considerable momentum backed by government incentives for affordable housing.

Structural changes, including the implementation of RERA, GST and IBC, as well as the earlier demonetisation drive, have further underpinned this consolidation. A broad-based recovery in demand across the sector appears to be some time away.

One of the key challenges currently impacting the supply dynamics is the liquidity crunch in non-banking financial companies and housing finance companies. However, government support in the form of a ₹25,000-crore fund for stalled housing projects, may bring relief.

Commercial segment

For the commercial segment, ICRA has given a stable outlook. The financing environment is favourable in the light of the successful listing of the first Real Estate Investment Trust (REIT), as well as the strong interest for rental-yielding assets demonstrated by foreign investment funds.

There is interest from institutional investors in building commercial real estate portfolios, consolidation of office spaces by large tenants resulting in increased demand for large-format office parks and healthy rental appreciation in certain micro-markets. Co-working companies were among the largest occupiers of office space in the last two years. But increasing market scepticism about the valuations in the segment may result in some moderation in growth plans for a large number of the co-working companies.

Along with the office leasing segment, industrial warehousing and retail mall segments have also benefited from stable demand profile from occupiers and favourable investment outlook. The demand for industrial warehousing has been driven by e-commerce and third-party logistics service providers.

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