COIMBATORE: Credit metrics of real estate companies will continue to deteriorate in 2014-15 as high residential prices continue to impact sales, India Ratings and Research has said. The rising bank credit to the sector indicates an increase in inventory, it said.
India Ratings, which is part of the Fitch Group, has maintained a negative to stable outlook on the sector for 2014-15 on the back of continued weak end-user demand and adverse consumer sentiments. Real estate companies have been facing falling unit sales, flat revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) margins and continued deterioration in credit metrics and cash flows.
The sale of fresh residential units (in sq. ft.) by listed real estate companies has seen a downward trend in the first half of 2013-14. This was because of weak consumer sentiments and low real estate affordability due to high prices, India Ratings said. However, bank credit to the sector saw strong double-digit year-on-year growth in 2013, which indicates build-up of inventories, according to India Ratings.
Most real estate companies rated by the agency have a stable outlook as the risks impacting the sector have been factored into their ratings. "The entities rated at investment grade are either single commercial properties with long-term lease agreements or residential companies with healthy sales and strong cash flows," it said.
Prices continued to remain high despite the weak end-user demand as demand from investors and speculators could have been lifted by the Central Government's efforts to curtail gold imports, the agency said.
The upward movement seen in National Housing Bank's house price index in the second quarter of 2013-14 after a fall in the previous two quarters supported this argument, as it coincided with the imposition of import duty on gold, India Ratings said.
Demand for retail space is also likely to remain muted in 2014-15 as retail companies continue to optimize 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 with conclusion of several large transactions by leading private equity players such as Blackstone.