A roaring recovery for realty sector from the pandemic: A CRISIL analysis

CRISIL's affordability index, MAHTI- which is the minimum income a household requires to buy a house in a city - has improved across all cities.

CRISIL expects residential real estate to see a moderation in growth rate to 5-10 per cent in fiscal 2023 translating into sales of about 205-215 msf in the top-six cities of India — Bengaluru, Pune, Hyderabad, Kolkata, Mumbai Metropolitan Region (MMR) and National Capital Region (NCR) — as interest rates start inching up and on a high base of fiscal 2022. Sales are expected to dart up 30-35 per cent to about 190-200 msf in fiscal 2022, after declining a 17-22 per cent in fiscal 2021.

It should surpass the pre-Covid-19 levels of 170-180 msf, due to a strong consumer pull from favourable affordability amid low interest rates and moderated capital values.

CRISIL’s affordability index, MAHTI (Minimum Annual Household Thre­shold Income Index) — which is the minimum income a household requires to buy a house in a city — has improved across all cities. The MMR and Hyderabad are largely driving incremental sales, due to lower interest rates and a huge wave of new launches.

Many organised and sma­ller pla­yers formed joint ventures and joint development agreements to take advantage of new wave, which are is visible in the quantum of new project launches in fiscal 2022, led by MMR and Pune, followed by Hyderabad. Fiscal 2023 is expected to witness fewer launches to avoid inventory oversup­ply. Capital values for the top-six cities are exp­ected to see a modest uptick of about 2-3 per cent for fiscal 2022 and a 1-2 per cent growth in fiscal 2023, after declining 4-6 per cent in fiscal 2021.

With improved sales, the total debt of listed developers declined by 14 per cent in fiscal 2021. The resultant imp­rovement in gearing is expected to continue in fiscals 2022 and 2023, leading to a sustenance in credit profiles. Large established developers with strong balance sheets will continue to gain market share in fiscal years 2022 and 2023.

Some mid-sized, regional developers, which have historically maintained low leverage, are expected to sustain their credit profiles. However, leveraged developers — dependent on debt as the primary source of capital — will continue to struggle, crippled by high leverage, weak liquidity and limited ability to raise equity and monetise commercial assets.

Commercial office

Net leasing (absorption of new office space less space vacated by tenants) of Grade-A commercial office space across the top-six cities is expected to reach 90-95 per cent of the pre-pandemic level in fiscal 2023, up from an estimated 70-75 per cent in fiscal 2022, with the employees’ return to office gathering steam and new hiring picking up strongly in key sectors such as IT/ITeS. This, along with steady rental collections (which had not fallen significantly), will ensure that the credit profiles of commercial real estate owners remain ‘stable’. Leasing remained modest in the first half of fiscal 2022, too. With supply exceeding demand, market occupancy shrank to 85 per cent in September 2021, from the pre-pandemic mark of 89 per cent in March 2020. That said, leasing activity is expected to pick up from the fourth quarter of fiscal 2022 and occupancy should improve to 87 per cent in fiscal 2023, closing in on the pre-pandemic level. Credit profiles of players should remain stable, considering the low leverage, strong counterparties and negligible impact on collections. An inc­re­ase in risk appetite, as business per­f­ormance improves, will remain a monitorable.