Fitch Ratings has said that the tightening bias of India’s monetary policy, together with slowing demand and growing liquidity concerns, could have a negative impact on the credit profiles of real estate companies. In Fitch’s opinion, the slowdown will also aid the process of weeding out some of the weaker entities within the sector, and increasing the relative strength of some of the larger, more established developers. Fitch warns that the liquidity risks on account of significant bullet repayments falling due during the course of 2008 remain a key challenge across the board.
There are visible signs of a slowdown in the property market, as sales have been slowing in almost all the major markets. Records taken from the stamp duty registration office in Mumbai show almost a 16% y-o-y fall in transactions by volume during the last financial year. Volumes are expected to further decline if developers persist in holding on to their current prices – and buyers anticipate a further fall with current rates being beyond reach, with affordability having significantly declined with rising interest rates.
However, larger, established, and well-capitalised companies with access to banks/financial institutions would remain better positioned to manage this risk. Conversely, some of the smaller players may end up either refinancing these at materially high rates of interest, or could default on their obligations. With access to capital markets likely to remain limited at the parent level, monetisation of SPV level stakes by attracting private equity participation would remain a key for managing overall funding and liquidity requirements.
However, a prolonged slowdown could also reduce the appetite of private equity. While Fitch will continue to closely monitor the developments in the sector, and take appropriate action where necessary, the short-term outlook is negative.
Fitch notes that large development plans and aggressive land purchases have led to a considerable increase in the financial leverage (debt/EBITDA) of most developers, with the smaller players now being exposed to liquidity pressures for project execution as well as a general slowdown in property sales. Property developers hit by falling sales and liquidity issues would need to reduce list prices to enhance demand, but many still seem to be holding on to the asking price – which, in Fitch’s opinion, would delay the process of recovering demand and increase the risk of liquidity pressures.
Fitch also remains concerned over the high cost of landbanks acquired in the recent past, which would have an impact on cash inflows – and hence the ability to service debt obligations. A slowdown in new project launches could also delay refinancing, as debt is taken as project debt.
