NEW DELHI: Weak housing sales and stagnant prices will pose challenge to big real estate developers over the next 12 months as their cash flows and project execution capabilities get affected, ratings agency Moody's said.
Developers will not reduce price to boost sales, rather will continue with their strategy to reduce apartment size and offer freebies, Moody's Investors Service said.
However, the agency said that "solid economic growth" would give some support to housing sales, while gradual easing of lending rates would boost investment activity.
"India's largest property developers will continue to face a challenging operating environment over the next 12 months - including weak cash flows, flat sales and stagnant prices," the agency said in a statement while releasing a report on the Indian property market titled 'Cash Flows to Remain Weak Amid Flat Sales and High Costs' today.
Sales volumes will remain weak because of unaffordable housing prices, resulting in unsold inventories.
"Aggregate cash flow for India's largest property developers will remain weak over the coming 12 months because the companies' sales will be flat and their costs will stay high," Moody's said, adding that the construction costs have increased in the past four years owing to high inflation.
Besides sluggish sales, delays in project completion would contribute in slow cash collections from home buyers as payments are generally construction-linked.
With the challenges in the operating environment, Moody's said that builders such as Indiabulls Real EstateBSE -1.37 %, Lodha Developers, UnitechBSE -0.82 %, DLF and Oberoi RealtyBSE -1.98 % would experience "most pressure on sales and cash flow" because they operate in Delhi and Mumbai areas where prices are the highest.
In contrast, the agency said the developers in relatively affordable markets like Bengaluru, like Brigade Enterprises, Prestige and Sobha should fare better owing to stable demand for housing.
Commenting on the report, Moody's Vice President and Senior Credit Officer Vikas Halan said: "...despite the difficulties, we expect solid economic growth in India to provide some support to housing sales, while the likely gradual easing of lending rates will also boost investor confidence and investment activity."
He said interest rate cuts by RBI, if passed on by the banks, would filter down to the property market, reducing the borrowing cost for developers as well as buyers, and supporting demand. RBI has cut interest rates thrice in 2015.
However, Halan said that high home prices and declines in savings rates will outweigh these factors, particularly in Mumbai and Delhi.
On prices, Moody's said: "Rather than reducing housing prices outright to drive sales volumes, developers will likely continue to modify their products and offer promotions".
Talking about the proposed real estate regulatory bill, the agency said it would improve consumer confidence but weigh on developers' cash flows.
Moody's said the ability of developers to execute projects across markets has been challenged in the past 2-3 fiscal years owing to delayed approvals and stretched liquidity.
The delays in projects completion have slowed the flow of payments from home buyers. It has also hit investors demand for new projects by locking up their capital and decreasing their expected returns.
With already significant oversupply in the market because of unsold inventories, Moody's said that new project launches would be muted.
On the proposed real estate regulatory law, Moody's said: "consumer confidence will get a boost from the Real Estate (Regulations and Development) Bill, which seeks to set up a regulatory authority and introduce guidelines for commercial and residential development."
The developers, however, face stricter terms over the receipt and use of cash advances, which will further weigh on cash flows, it added.
Moody's believes that the bill promotes transparency, accountability as well as discipline in the industry, which is positive for buyers.