With the COVID-19 pandemic crushing economic activity as well as, big-ticket spending, small to mid-sized developers are left to fend for themselves in these testing times. As per a recent CRISIL report, the already languishing residential real estate demand is expected to plunge further by 50-70 percent in the current fiscal year.
With demand sinking in with a great pace, the prices are expected to be hit. CRISIL expects a price correction of 5-15 percent across ticket sizes.
The sector anyway was not in its top form before the pandemic as well. The past decade has seen a major slump in residential real estate. Demonetization, un-affordability, surge pricing, delay in completions are some of the factors which had hit the sector badly resulting in fall in demand.
The credit agency further mentions in the report that small-to-mid-sized developers would face a sharp around 200 per cent rise in funding gap this financial year. However, their ability to raise capital will be limited as the debt-to-total assets ratio was significantly high at around 75 per cent as of March 2020. On the other hand, their interest cover is also weak at 1.2-1.5 times versus two times for large developer groups.
Due to income uncertainty arising from pandemic coupled with weak investor sentiment, demand translation is expected to be feeble despite improved affordability and price-correction.
“Lowering capital values and attractive interest rates augur well for affordability which has improved by 10-30 percent across cities during the past five years- as measured by CRISIL’s proprietary index MAHTI. Despite improved affordability, demand translation will be feeble led by income uncertainty arising from pandemic coupled with weak investor sentiment emanating from pressure on capital appreciation / rental yields in the sector over the past few years,” Money Control quoted Isha Chaudhary, Director, CRISIL Research, as saying.
The testing times will prove more harsh to small and mid-sized developers. Big names with deep pockets with strong delivery track records are expected to manage better than others.
In fact, established names like Sobha, Indiabulls Real Estate, Prestige Estate, Godrej Properties and Sunteck Realty have already delivered solid returns on Dalal Street ranging from 40 per cent to 70 per cent since April 1, while the benchmark BSE Sensex has gained 37 per cent.