The country’s residential real estate segment has been witnessing a prolonged downcycle owing to high inventory overhang, muted demand, weak affordability and declining investor interest, according to rating agency ICRA.

ICRA’s outlook for FY22 remains Negative for the residential and retail real estate segments and stable for the office leasing segment

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The Covid-19 pandemic served as a double whammy, with overall housing sales volumes recording a YoY decline of 50 per cent in H1 FY2021, across the top eight cities of the country.

However, post a sharp decline in Q1 FY2021, sales bounced back considerably with a QoQ growth of 60 per cent in Q2 FY2021, primarily driven by a gradual unlocking of the economy, pent-up demand, and improved affordability on the back of reduced home loan rates and attractive payment schemes/discounts.

Despite the recent uptrend, ICRA expects overall sales volume to decline by 35-40 per cent in FY2021. FY2022, however, is expected to witness some normalisation, resulting in YoY growth of 40-45 per cent, which would take the overall sales close to 85-90 per cent of pre-Covid-19 (FY20) levels. Collections are expected to largely return to pre-Covid-19 levels by FY22.

Shubham Jain, Senior Vice President and Group Head, Corporate Ratings, ICRA said, “Even upon subsequent recovery to pre-Covid-19 levels, timely liquidation of the high unsold inventory, particularly in over-supplied regions such as MMR and NCR, would still remain a challenge. Adequacy of operating cash flows to meet debt obligations would be a key look-out area, with residential developers having built up high debt levels on account of slow-moving inventory or high investment in land assets.”

“The trend of market consolidation is likely to accelerate, with range-bound prices and low home loan rates expected to continue supporting sales for established players,” he said.

Cash flows in the office leasing segment has been among the least affected by the Covid-19 pandemic. For FY21 as of December, there has been limited revenue loss for developers of Grade A office space while the occupancy in existing leased portfolio has not witnessed any material weakening till date.

However, the segment has witnessed lower incremental pre-leasing and absorption of completed supply during FY21, compared to the earlier years.

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Due to relatively stable cash flows and limited impact on occupancies in existing properties, the credit profile of most of ICRA’s rated issuers in the office leasing segment is expected to be stable.

The retail segment witnessed significant impact on the revenue during FY21 on account of closure of operations for two to five months and consequent rental waivers offered by mall operators.

Most of the mall developers opted for the moratorium benefit and the interest during moratorium was capitalised by the lenders, cushioning the impact on the credit risk profile during FY21. Post resumption of operations, the footfalls and trading densities in malls have been gradually improving.

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