Residential and commercial sectors to stand as pillars of resilience

The residential segment will remain largely steady, and the commercial segment will exhibit strong growth. After a scorching run-up in the last two financial years, demand growth in the residential real estate segment is expected to show steady growth this financial year, supported by a stable interest rate environment and a positive outlook for the segment.

 

Growth is expected to be stable on the supply side as well. With a stable outlook for both demand and supply, the year-to-sales indicator for inventory will continue to remain favourable.

 

The fundamental drivers of demand remain positive. Reputed developers recorded steady growth in sales booking revenue in the first half of this financial year, driven by demand in the high-end and luxury segments. This upward trend is further augmented by a notable shift in consumer preferences, with homebuyers increasingly opting for spacious units and projects that offer a premium array of amenities.

 

The next financial year may see an improvement in affordability, driven by potential repo rate cuts, which could lower home loan interest rates.

 

Boosted by buoyant sales and collections, the leverage and credit profiles of real estate developers have strengthened over the past three financial years. With demand and collections expected to remain healthy, credit profiles are set to see further improvement over the medium term. Accordingly, their leverage, as indicated by the debt-to-cash flow from operations (CFO) ratio, is expected to improve to 1.4x for 2024-25 (FY25) and 2025-26 (FY26), from 1.6x in 2023-24 (FY24). Further, collections to interest are also expected to rise to 16.5-17x for FY25 and FY26, from 15.8x for FY24.

 

Commercial segment to cross pre-pandemic highs

 

In contrast to the trend in the residential segment, the commercial office space market is poised for healthy growth this financial year and the next, as new leasing activities are projected to surpass pre-pandemic highs.

 

Net absorption is expected to increase by 14-16 per cent this financial year to 43-45 million square feet (msf). The uptrend is expected to continue next financial year, with an additional 8-10 per cent growth, driven by the expansion of global capability centres (GCCs) across sectors and high growth in specific sectors, such as banking and financial services and flexible workspaces.

 

GCCs account for 30-40 per cent of net leasing, providing value-added services to global players and tapping into India’s talent pool and cost advantages. Flexible workspaces, which provide agile, cost-effective, and hybrid-friendly solutions, are rapidly expanding in Tier-I and Tier-II cities. The demand growth from other sectors, such as engineering and manufacturing and information technology (IT)/IT-enabled services (ITeS), is expected to remain modest.

 

On the supply side, Grade A completions are expected to remain steady, with 52-58 msf of new office space additions in the current and next financial years. The growth is largely aligned with that in net absorption, keeping vacancy levels steady at 17 per cent.

 

The upswing in net leasing demand, coupled with the amendment to the Special Economic Zone Act, 2005, which permits floor-wise denotification for the IT/ITeS sector, will lead to high occupancy rates of CRISIL-rated office players at 90 per cent.

 

This, along with the increase in rentals and prudent leverage, is likely to keep the credit profile healthy. The debt-to-earnings before interest, tax, depreciation, and amortisation ratio will remain between 4.3x and 4.5x in the current and next financial years, compared with 4.5x and 4.7x in the past three financial years.