India Ratings & Research (Ind-Ra) maintains a
negative to stable outlook on the real estate sector for 2014-15 ( FY15) 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 margins and continued deterioration in credit
metrics and cash flows.
Most Ind-Ra rated real estate companies have a Stable
Outlook, as the risks impacting the sector have been factored in to 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.
Increase in Inventory..
Ind-Ra believes credit metrics will continue to
deteriorate in FY15, as high residential prices continue to impact sales, even
while rising bank credit to the sector indicates an increase in inventory for
the sector. The sale of fresh residential units (in square feet) by listed real
estate companies has seen a downward trend in 1HFY14.
This is due to weak consumer sentiments and low real
estate affordability due to high prices. However, bank credit to the sector saw
strong double-digit yoy growth in 2013, which indicates build-up of
inventories.
Weak end-user demand..
Prices continue 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 upward movement seen in National Housing Bank’s
house price index in 2QFY14 after a fall in the previous two quarters supports
this argument, as it coincides with the imposition of import duty on gold.
Ind-Ra expects subdued commercial property demand to
continue in 2014, due to the continued slow economic growth which will impact
fresh hiring in most sectors. Demand for retail space is also likely to remain
muted in FY15, as retail companies continue to optimise their store portfolios.
Real Estate Investment Trusts..
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. Ind-Ra
expects the introduction of real estate investment trusts (REITs) to be
positive for the sector, as it is likely to attract new investors and hence
improve funding availability.
As these REITs are likely to invest most of their
funds in to rent-yielding commercial properties, this could provide further
liquidity options to commercial property developers.
WHAT CAN CHANGE THE OUTLOOK..
Demand Improvement..
A rise in demand, leading to strong free cash flows
and reduction in debt levels could change the sector outlook to stable.
Asset Monetisation..
Sale of land and commercial property assets, leading
to substantial reduction in debt levels could lead to an upgrade of individual
ratings.
For Media Contact
Saraanya Shetty
Manager – Corporate Communications and Investor
Relations
India Ratings & Research A Fitch Group Company
Call: +91 22 4000 1729 Fax: +91 22 4000 1701
Saraanya.shetty@indiaratings.co.in
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