Residential real estate sales to lag commercial in FY23: CRISIL

CRISIL expects primary residential sales to post modest volume growth of 3-8 per cent on-year in 2022-23 (FY23) on a high base of the previous year for the top eight cities.

The increase in primary residential sales will be despite a reversal in the purchasing power of homebuyers.

Affordability has taken a hit in FY23 owing to an uptick in interest rates and capital values, and a reversal of stamp duty cut across key states. The demand momentum has sustained despite a rise of 6-10 per cent on-year in capital values across cities, following a steep increase in raw material cost.

In the case of Mumbai, property registrations (including that of resale properties) more than doubled on-year between April and November, albeit on a low base, while overall registration in the rest of Maharashtra increased 16 per cent on-year over the period.

Sales for large builders were even better. 

In the first half of the current financial year, six key listed developers registered a sharp 70 per cent on-year rise in sales booked (on a volume basis), with new launches nearly doubling on-year, albeit on a low base of last year when the volume was affected following the second wave of Covid-19.

In 2023-24 (FY24), demand is expected to rise further on-year; sales are projected to print a higher 5-9 per cent compound annual growth rate for all cities over the next two financial years, except the Mumbai Metropolitan Region (MMR). 

Demand in MMR is already on a high base, and the removal of stamp duty benefits, as well as the imposition of an additional stamp duty of 1 per cent (metro cess starting April 2022), have partially restricted incremental demand. But the Maharashtra government’s recent announcement on the extension of stamp duty waiver to three years in case of a resale property could see some traction from investors. Also buoying demand will be a significant improvement in infrastructure and connectivity expected across MMR in the near term.

In contrast, sales in the National Capital Region are expected to see relatively higher on-year growth of 7-8 per cent vis-à-vis MMR at 0-2 per cent in FY23 and FY24 because of policy push and overall improvement in the regulatory environment, which has increased consumer confidence in the region’s property market.

In the case of Bengaluru and Hyderabad, incremental demand will primarily be from those employed in the information technology (IT)/IT-enabled services, banking, financial services, and insurance sectors as salaries of employees in these sectors continue to grow steadily.

On the launch front, following a plunge in 2020-21 (FY21), there was only a moderate rise in 2021-22 (FY22) as developers largely focused on completion rather than commencing new projects. Also, a majority of the launches over the past two financial years were contributed by organised developers instead of mid- and small developers. The share of key six listed developers rose to 50-60 per cent of overall launches in the past two financial years, from sub-40 per cent, with the trend likely to continue.

Launches are forecast to continue to gradually increase in FY23 and FY24, reaching the pre-pandemic level of Rs 200 million square feet (msf) annually.

Also, completions are gaining momentum. After a drop in FY21 owing to the unavailability of labour and raw materials that deterred construction activity, completions are expected to be upwards of 450 msf in FY23. But, thereafter, as the situation normalises, completions are forecast to maintain a steady momentum of 300-310 msf annually up to FY24.

On the commercial real estate front, after a healthy performance in the first half of this financial year, net leasing will slow down in the second half owing to fears of an impending global recession, leading to an estimated lower double-digit growth rate for FY23. In FY24, though, net leasing is forecast to pick up gradually, which will translate into up to a 100-basis point improvement in occupancy.

While leasing demand will be lower than expected, the credit profile of players rated by CRISIL Ratings is likely to remain stable. The ratio of debt-to-earnings before interest, tax, depreciation, and amortisation, which indicates leverage, will remain comfortable at 4.4x in FY24 vis-à-vis 4.6x in FY23. And while the cost of debt has been inching up, debt service coverage is expected to also remain healthy at 1.7-1.8x in FY23 and the next.

Consequently, the leverage and credit profiles of real estate developers, which had strengthened following recovery in FY22, should sustain over the medium term. 

Our sample set of 11 large and listed developers have also benefited from the strengthening of capital structures through equity raise and monetisation of assets of Rs 18,000 crore over the past two financial years, which have helped them navigate the peak of the pandemic. That, along with strong sales momentum, will improve their debt-to-total assets ratio (a measure for leverage) significantly to 23 per cent by March 2023 and 21 per cent by March 2024, from 42 per cent at the start of the pandemic.

The upbeat forecast will not be restricted only to large developers. Some mid-sized developers that have historically maintained low leverage are expected to sustain their credit profiles as well. However, leveraged developers with debt-to-total assets above 50 per cent may struggle owing to weak liquidity and limited ability to raise equity and monetise commercial assets.