CHENNAI/SINGAPORE,
January 16 (Fitch) 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. Source: Reuters
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