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The consumer appetite for new realty project launches is at an all-time low. Declining property sales coupled with stretched balance sheets are bound to remain a concern in the short-term leading to a moderation in property prices in some markets, says a new report.
The real estate sector’s ability to service debt is bound to determine the hold on price of new projects. While the debt-equity ratio at less than one indicates a comfortable leverage situation, the ability of operators to service debt has taken a beating, says the new report by market research firm Knight Frank.
According to Reserve Bank of India data for June, outstanding bank credit to the real estate sector is Rs 5,31,300 crore. While 78 per cent of this exposure is towards the housing loan segment, the remaining 22 per cent is related to real estate developers.
An evident trend is the decline in the banking sector’s exposure towards commercial real estate lending. Growth has come down from 23.2 per cent in June 2011 to just 4 per cent in June 2012, says the report.
In its report titled `Economy and Realty @ Glance', the firm has said in the short term, factors other than law of demand will have an upper hand in determining the direction of property prices, given declining property sales.
The report adds that interest rates have been on the rise since the beginning of 2010, when the RBI started increasing the key policy rates in the wake of high inflation. Since January 2010, RBI has increased the repo rate by 325 basis points. Coupled with stringent lending norms for the real estate sector, this has sent interest rates spiralling for the sector, it adds.
Between FY10 and FY12, although debt increased by a marginal 0.4 per cent, interest cost increased by a significant 81 per cent. The increase in project completions during the period also led to higher interest cost recognition during this period, the report states adding that the momentum of the industry has reduced with profitability taking an even bigger hit.
During the five-year period between FY2008 and FY2012, while the sales value of the real estate sector was down by 15 per cent, net profit was down almost 67 per cent, primarily on account of the interest cost going up five-fold.
amritanair.ghaswalla@thehindu.co.in
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