The BSE Realty Index has been one of the worst sectoral performers over the past month, shedding more than 35 per cent of its value because of the adverse impact of the COVID-19 pandemic. While the sector has been grappling with weak demand, economic disruption is expected to worsen the situation, impacting both residential and commercial segments.
India Ratings and Research expects residential demand may be suppressed in FY21 as well, given increasing downside risks to the country’s economic growth from the pandemic. The rating agency believes the demand-side risks, combined with rising uncertainty over credit availability because of the market meltdown and increasing risk aversion, could add to the refinancing and liquidity risks.
Besides, supply disruption related to construction equipment and materials, as well as labour unavailability, would hamper existing projects and delivery schedules.
Leveraged players in the residential and the commercial segments could be under pressure given the street fears of an extended slowdown. Bengaluru-based realty player Sobha has shed 55 per cent since January over concerns related to weak sales, rising leverage and promoter pledge.
The management has, however, indicated that it is committed to bringing down debt over the next few quarters from the current Rs 3,100 crore as of the December quarter (net debt to equity ratio at 1.3 times) to Rs 2,600 crore which will bring the ratio down to 1.1 times over the next couple of quarters. While analysts believe that the selloff is overdone, sales momentum in the current circumstances will be difficult to achieve.
The impact for realty players in the commercial segment from the disruption because of the virus is expected to be high. State governments had earlier directed all malls, barring those selling groceries, to close down and this could impact revenues for the March, as well as the June quarter. Adhidev Chattopadhyay of ICICI Securities, says: “With the COVID-19 issue likely to linger until at least Q1FY21 (April-June 2020), mall operators stand to lose 20-25 per cent of their annual revenue assuming that a rent-free period is given to retailers.”
The other key issue is the negotiations related to rent renewals for FY21. The brokerage highlights that 50-60 per cent is up for renewal in Phoenix Mills’ High Street Phoenix and all Market City malls in the FY20-22 period. Brigade Enterprises derives Rs 110 crore of annual revenue from its two Orion malls in Bengaluru, while Oberoi Realty gets Rs 160 crore revenues from Oberoi Mall in Mumbai.