India Ratings revises realty sector outlook to 'stable' from 'negative' for 2013

MUMBAI: India Ratings has revised its outlook for the Indian real estate sector to negative to stable for 2013, from negative in 2012. Demand for real estate remains subdued and operating margins low, leading to weak credit metrics for companies in the sector, the ratings agency said in a release.

India Ratings, however, sees signs of improvement in terms of stability of margins and the easing of liquidity pressures, with free cash flows turning positive since second half of FY12.

Demand for residential real estate stabilised in 2012, with year on year growth in home loans from banks showing an uptrend from May 2012. However, the sales of large players declined marginally in 2012, the rating agency highlighted.

An encouraging trend noted by India Ratings is the easing of liquidity pressures. In 2011-12, realty companies generated positive free cash flows and the trend continued into first half of 2012-13. Apart from stable demand, other efforts to improve liquidity included strategies like monetisation of land and non-core assets, exercising prudence in new launches and adopting the JV route to developing projects.

Demand for commercial space will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 has been around 28%-32% lower than in the previous two years. Demand for retail space is likely to be muted in the near term.

EBITDA margins which had been steadily declining from about 55% in 2007-08 remained at around 30% during 2012. With subdued sales and the lower level of profitability at which the industry seems to be stabilising now will keep financial leverage at elevated levels of around 6.5 times in the short to medium term.

To achieve a significant improvement in leverage, companies will need to rely less on debt financing and focus on buyer advances and internal accruals, a strategy which can only be adopted if there is an improvement in demand, the release said.