Real estate consultant Cushman and Wakefield in its year-end review says residential property prices for new projects in key metro markets have fallen over the last two years. Launch prices of mid-segment projects in high development activity markets within the National Capital Region (NCR), Mumbai and Bengaluru were 4-20% lower.
Contrary to expectations that the lower home loan rates seen over the last two quarters would fuel demand for residential property, the real estate sector still suffers from structural issues like affordability. In fact, the time correction when property prices were sticky for several months has gradually slipped into a price drop in some markets. The festive season hardly revived demand. NCR was the worst affected and Bengaluru was the more resilient of the metro markets.
A Motilal Oswal Financial Services Ltd report points out that during the December quarter, developers focused on clearing existing inventory, as a result of which new launches in the top eight cities fell by 11% when compared with even the September quarter, which too was a lacklustre quarter.
Obviously, a combination of lower sales, fewer launches and lower prices mean lower revenue accretion for property developers. This is detrimental to the balance sheets of realty firms, as most of them have huge debts to service, which eats into the paltry operating income generated. While subdued commodity prices have been a boon for the sector, the high fixed costs weigh down on profitability. Hence the Street expects realty firms’ operating margins to narrow in the December quarter from the year-ago period.
The BSE Realty index, therefore, continues to underperform the broader benchmark BSE Sensex. Investors will give a thumbs up to any firm that offers relief in profit margins or in bringing down debt through asset sales.
Mint’s data analysis shows that over the last five years, the aggregate debt-equity ratio of the BSE Realty index firms has risen from 0.6 to 0.7. Low sales and rising interest is mirrored also in the falling interest cover ratio, from 3.5 to 2.1 during the same period.
The weak traction in sales is likely to keep the sector under stress for some more quarters. At best, as the India Ratings report of 14 January says, a higher real disposable income due to the low interest rates expected ahead along with a hike in salaries as a result of the Seventh Pay Commission recommendations could prop up discretionary expenses.