Synopsis
• India continues to be a development engine in the face of inflation and unstable geopolitical conditions, such as the Israel-Palestine and Russia-Ukraine wars. To strike a balance between economic
• growth, on October 09, 2024, the Reserve Bank of India (RBI) kept the repo rate at 6.5% for the eleventh consecutive period. Furthermore, the RBI changed to a neutral posture, creating the prospect of a rate drop in the second half of FY2025 (FY stands for fiscal year, which runs from April 1 to March 31). The real estate industry, which contributes significantly to India’s GDP, is anticipated to gain from this action.
• In recent years, there has been a considerable transformation in the residential real estate (RRE) scene in India. It struggled with large amounts of unsold inventory, negative customer sentiment, and lender aversion prior to the pandemic, all of which contributed to the slowness. But in the years after the pandemic, the industry saw a spectacular comeback, propelled by rising earnings, a boom in outsourcing activity due to the expanding presence of Global Capability Centres (GCCs), increased demand for housing, government incentives, and infrastructure development. Before the epidemic, inventory levels frequently above 30 months, but they are already falling below 18 months. Over the next two years, CareEdge Ratings anticipates that inventory levels will remain below 15 months due to the assumption of sustained strong sales growth.
• The Real Estate Regulatory Authority’s (RERA) stricter regulations and more transparency are primarily responsible for the structural change. This has caused the market to become more consolidated as a result of several smaller and weaker competitors leaving. Notably, customer tastes have shifted significantly in favour of larger and more upscale residences, which currently account for the majority of all reservations. Prior to the pandemic, the inexpensive sector dominated this market. Furthermore, sustainability has emerged as a crucial consideration when buying a home.
• Having seen several economic cycles, seasoned developers have developed greater financial discipline by adopting asset-light development strategies and depending more on client advances. The strategy has produced strong balance sheets and notable deleveraging. With an emphasis on Environmental, Social, and Governance (ESG) compliances and utilising cutting-edge technology to improve operational efficiency, it also puts businesses in a strong position to take advantage of future development prospects.
• According to CareEdge Ratings, the demand for housing will continue to be strong over the next two years, with a 10-15% increase in launches and sales. Leading listed businesses’ balance sheets will probably remain healthy due to the combination of good collections and an asset-light growth approach, with the total debt-to-collection ratio anticipated to stay below 0.70 times. It is anticipated that these players’ combined bookings and collections would rise by 15% to 20% in FY25, reaching Rs. 130,000 crore and Rs. 80,000 crore, respectively.
• CareEdge Ratings explores significant changes in the residential market, the performance of major listed companies, including the tendency towards deleveraging, as well as opinions on the credit ratings environment and the segment’s general outlook in this opinion article.
Following over ten years of stagnation, the housing industry has shown incredible resilience in the post-COVID period, riding the wave of headwinds to tailwinds. Before the epidemic, the industry was struggling with a number of issues, including the demonetisation process, the implementation of RERA, the problem involving non-banking financial companies (NBFCs), and negative consumer confidence. The epidemic presented a serious setback as the sector appeared to manage these difficulties. But following a short lull, the epidemic also served as a spur for a comeback, with attitudes towards house ownership becoming more optimistic than before. Significantly low interest rates, growing incomes, more household savings, and supporting policy measures like stamp duty reductions and other measures from different State Governments all contributed to this pandemic-induced demand. As a result of the excellent demand situation, sales in CY22 (CY stands for calendar year, January 1–December 31) and CY23 consistently reached multi-year highs.
It is anticipated that the growing momentum in CY24 would result in high bookings for the third year in a row. Urbanisation, nuclearisation, and a rise in offshore in tier-I cities are long-term growth drivers that seem to be mostly unaffected and are supporting the labour market. Furthermore, infrastructure initiatives supported by the federal and state governments are greatly improving accessibility and connectivity, which is causing new real estate development zones to appear. Demand has increased as a result of government initiatives like RERA, the Pradhan Mantri Awas Yojana (PMAY), and the Special Window for Affordable and Mid Income Housing (SWAMIH) Fund, which have enhanced affordability, supply, and transparency. Furthermore, the RRE industry has sufficient capital availability, as evidenced by strong institutional investments in CY23 and H1 CY24.
Following favourable trends underpinned the recovery/revival:
- Consistent decline in inventory overhang: The industry, once tested through high unsold inventory levels of over four years, have witnessed significant decline in inventory levels to less than 1.5 years in CY23, as reflected from Chart 1. This is mainly due to better demand absorption observed through strong sales momentum witnessed in post-pandemic era, despite robust new inventory additions. This decline in
inventory overhang showcases the resilience of the industry and the effective alignment of market demand and supply.