By Accommodation Times Bureau
16 Jan 2012
Fitch Ratings- New Delhi/Singapore-16 January 2012: Fitch Ratings says it has a Negative Outlook for the Indian real estate sector in 2012 due to weak overall demand and higher construction costs, which are likely to continue to squeeze margins.
High equated monthly instalments, resulting from significantly higher interest rates, lower household surplus due to high inflation and high residential unit prices, have reduced the affordability of homes. Both material and labour costs increased during 2011. Residential segment sales, which had improved in Q111, moderated significantly and are likely to continue at the lower levels during H112. Oversupply of commercial space continues in some markets. However, the demand for office space is likely to be maintained at 2011 levels as the hiring momentum of the IT/ITeS sector, the major driver of office space in India, continues in 2012. Demand for retail commercial space is expected to be low in 2012.
Gearing continued to increase for most companies in H211, though the overall gearing of large real estate companies decreased by about 20% from the post-crisis peak of around 0.89x. On the other hand, declining profits resulted in leverage (debt to EBITDA) at high levels in 2011 – at around 7x – and this is expected to continue in 2012, negatively impacting the creditworthiness of real estate companies.
The dependence on operational cash flows to fund growth and service debt is likely to increase. Fund raising options are limited due to the cautious approach of banks, weak equity markets and dwindling investment by private equity funds.
Improved macro-economic conditions leading to improved demand would have the potential to improve cash flows to real estate companies and see the outlook revised to stable. Also, the ability to judiciously use cash from liquidating existing inventories, which would improve capital structures, may result in the selective upgrades of companies in the real estate sector, even while the overall outlook is negative.
Fitch Ratings currently maintains coverage of approximately 6,000 financial institutions, including over 3,500 banks and 1,400 insurance companies. Finance & leasing companies, broker-dealers, asset managers, managed funds, and covered bonds make up the remainder of Fitch Ratings’ financial institution coverage universe.
Additionally, the agency currently rates more than 2,000 corporate issuers, 100 sovereigns, 200 sub-sovereigns, 300 global infrastructure ratings, and 46,000 U.S. municipal transactions. Fitch Ratings maintains surveillance on over 6,500 U.S., 1,300 European and 400 Asian structured finance transactions.
Fitch India has six rating offices located at Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad. Fitch is recognised by Reserve Bank of India, Securities Exchange Board of India (SEBI) and National Housing Bank.