During the year 2016-17, several policy changes by the Indian government has made both negative and positive effects on the real estate sector. As the sector continues to adapt and flourish with the new regulations, India Ratings and Research (Ind-Ra) continues to uphold a negative stance for the residential real estate for the financial year 2019. This is because the absence of a meaningful price reduction is likely to lead to a delay in the demand revival for properties.
Commercial real estate is expected to remain stable on account of continued demand, low refinancing risk and limited grade A. On the other hand, the continued slump in sales of residential unit is anticipated to affect the cash flows, and further increase inventory levels and debt in the sector.
Besides, a margin squeeze for homebuilders is likely to happen due to a price reduction despite rising cost of inputs such as steel and cement. Ind-Ra in its report says that this will negatively affect developer’s cash flows and credit profiles.
However, regulatory support has been helping affordable housing project grow. Leading to a rise in overall sales of the sector, affordable housing projects of Ind-Ra-rated companies contributed from 20 per cent to 40 per cent of the total sales. With bank credit drifting towards the affordable segment, the uptrend is likely to gain momentum.
Awarding infrastructure status to affordable housing, the government of India has permitted a larger area for the unit size under affordable housing. However, the progress on the Pradhan Mantri Awas Yojana has not been impressive. The report reflected that over 90 percent of the work under the scheme is still pending in most states.
Whereas, Ind-Ra expects the demand for commercial office space to remain stable during the financial year 2019. This opinion is in consideration of the demand from the financial sector in Mumbai and the IT-ITeS and e-commerce sectors in some key cities including Gurugram, Bengaluru, Chennai and Hyderabad.
Although the penetration of e-commerce is growing, demand for retail space is likely to remain robust on account of limited grade-A supply in the cities mentioned above. Driven by stable demand conditions, attractive yields would translate into ease of financing in this segment. The Ind-Ra reports says that yields on office, retail and industrial buildings are likely to remain stable across major destinations of the country.