Real estate firms are once again adding inventory at a faster clip as sales offtake fails to keep pace with the rising supply of new properties. At the end of March this year, top listed developers were sitting on unsold inventory worth Rs 99,000 crore. If receivables (the amount due from buyers for partial sales) are included, the amount comes up to Rs 1.16 lakh crore, highest in the last decade. The total value of unsold inventory is equivalent to 26 months’ worth of sales and highest in the last seven years. This was around 23 months during the end of FY16.
The sector, however, saw a mild improvement in terms of inventory to sales ratio during the first half of current financial year with net sales growing faster than inventory during the April-June 2017 period. Net sales was up 5.4 per cent year-on-year (y-o-y) during the first half, slightly better than 5.2 per cent y-o-y growth in inventory during the period. Based on first-half numbers, inventories are now equivalent to 25 months of sales — up from 23 months’ worth of inventory at the end of FY16. (See chart)
The unaudited numbers for the first-half are, however, not strictly comparable with audited numbers as these may or may not include the finances of subsidiaries and joint ventures. The analysis is based on the annual finances of 23 real estate developers that are part of BSE 500, BSE mid-cap and BSE Small cap index. Some of the major builders in the sample include DLF, Indiabulls Real Estate, Godrej Properties, Sobha Developers, Oberoi Realty, Prestige Estates, Phoenix Mills, HDIL, Peninsula Land, NBCC, Brigade Enterprises and Kolte Patil Developers. The numbers for listed developers understate the level of unsold inventory in the industry. “The industry is sitting on four-year sales worth of inventory as home sales have lagged new launches. This is largely due to a mismatch between home prices and buyers purchasing power,” says Pankaj Kapoor, founder, Liases Foras. Things seem to be even worse in the Mumbai Metropolitan Region (MMR) — country’s largest housing market by value. According to a joint report by Cushman and Wakefield and Propstack, of 670,339 units registered in MMR, 350,000 units remain unsold with an inventory overhang of 52 per cent as of 31 August 2017. In last three years, the industry’s combined inventory has grown at a compounded annual growth rate (CAGR) of 11 per cent against 7.5 per cent annualised growth in net sales. The fastest growth has been in receivables that have doubled in the period growing at a CAGR of 21.3 per cent. Experts attribute this to the industry practice where apartments can be booked by paying as little as five per cent of the home value. Kapoor says the industry has tied itself in a situation where lower offtake has forced developers to make high-cost borrowings and delay project completion pushing project cost. “For builders, finance cost could be 40 per cent of the project cost — up from 12-15 per cent a few years ago. This has created a vicious cycle of higher cost, higher prices, poor demand, growing inventory and greater debt,” says Kapoor. It shows in the finances of listed developers. The industry’s combined gross debt has grown at a CAGR of 12.5 per cent in the last three years to reach Rs 81,000 crore at the end of FY17 translating into debt to equity ratio of 0.9x. Interest expenses were equivalent to 16 per cent of the industry’s net sales during FY17 up from 11.2 per cent in FY11. The trend persists in the current fiscal with firms’ combined debt up 9.7 per cent y-o-y during April-September 2017 period while interest expenses were up 8.1 per cent y-o-y, against 5.4 per cent y-o-y growth in net sales during the period. Interest expenses are now equivalent to 16.2 per cent of net sales up from 15.8 per cent a year ago. “There could be an uptick in industrial growth but this is not likely to help the sector due to poor state of the jobs markets and a lack of appetite from investors who are now largely investing in equities,” says
G. Chokkalingam, MD, Equinomics Research and Advisory.