The momentum in housing demand across India's top-6 cities is expected to continue this fiscal and grow 5%-10% despite rising property prices, interest rates and a high-base effect, says a research note.
Aniket Dani, director of CRISIL Research, says, "We expect residential real estate prices to rise 6%-10% across the top six cities this fiscal due to a steep rise in material costs and relatively favourable demand-supply dynamics, especially for established developers. Some of them have started hiking prices by about 2% per quarter and may continue to do so over the next couple of fiscals to account for rising land prices. However, in spite of these headwinds, housing demand is likely to grow 5%-10% supported by favourable demographics and urbanisation."
In the report, CRISIL Ratings says it believes that strong demand, lower inventory levels and strengthened capital structures auger well for the industry. However, any aggressive debt-funded growth in the industry will bear watching over the medium term.
The leverage and credit profiles of real estate developers, which had strengthened on the back of the recovery in fiscal 2022, should sustain over the medium term, it added.
CRISIL estimates housing demand rose a solid 33%-38% last fiscal, surpassing pre-COVID-19 levels. But this was on a low base of fiscal 2021, when demand had fallen 20%-25% (see chart below).
"Affordability, after improving up to 20% between fiscals 2016 and 2021, had started declining from the second half of fiscal 2022. Now, the headwinds are higher capital values and interest rates, reinstatement of stamp duty, and the high-base effect of fiscal 2021, CRISIL Research's proprietary minimum annual household threshold income (MAHTITM) index indicates," the rating agency says.
According to the report, inventory levels in the majority of the top-6 cities are comfortable at two to four years as against three to five and a half years before the pandemic.
It says, "The correction happened because of fewer launches in the past two years owing to the pandemic, and slower sales momentum. Although new launches are expected to catch up, healthy demand will keep the inventory levels in check over the medium term. This will be largely driven by established developers, which will benefit from the sales momentum, the shift in demand to organised players, sound balance sheets, and an asset-light approach."
"These realtors will continue to gain market share, cornering 24-25% of the spoils by March 2022, compared with about 18% at the start of the pandemic, CRISIL says, adding, "In fiscal 2021, their sales grew 13%, while the industry contracted 20-25%; in fiscal 2022, sales of these developers are estimated to have grown 35-40%, in line with the industry."
According to Kshitij Jain, associate director of CRISIL Ratings, established developers now have more substantial balance sheets, reflected in a comfortable debt-to-total assets ratio of around 25% last fiscal versus more than 40% at the start of the pandemic (see chart below).
"They are also well-placed in terms of liquidity, having raised Rs13,000 crore through equity and monetisation of land and commercial assets in the past two fiscals. Their improved financials will come in handy to fund growth and keep credit profiles stable," he added.
Small and mid-sized developers, too, are seeing better days, the report says, adding their balance sheets have improved, with their debt-to-total assets ratio falling below 50% in fiscal 2022 from 55%-60% before the pandemic.
"However, these players have a higher dependence on debt and may need to tie up with established players for new launches to benefit from the latter's financial flexibility and strong brand," CRISIL concludes.