Unfavourable court verdicts aren't the only worry for real estate firms. Despite property prices correcting in major cities, sales have been subdued as buyers have preferred to stay on the sidelines. As a result, the financial position of realty firms has deteriorated sharply.
As shown in chart 1, sales in the top eight cities of the country dipped to 135,016 units during the first half of 2016 (January to June), from 141,341 units during the second half of 2015 (July to December). This has led to only a marginal decline in unsold inventory, which Knight Frank estimates, has fallen from 714,972 units in the second half of 2014, to 660,239 units in the first half of 2016.
Unsurprisingly, developers have postponed fresh launches, which have declined from 165,426 units two years ago to 107,120 units in the first half of 2016.
The muted sales in bigger cities are in spite of reduced prices. As shown in chart 3, CBRE Research estimates that over the past year, prices have corrected in all major cities, barring Bengaluru and parts of Hyderabad. Clearly, the quantum of price correction has failed to trigger demand.
With many new launches failing to take off, owing to lack of demand and delays in obtaining permission etc, the financial position of real estate firms has taken a turn for the worse. As shown in chart 4, the aggregate debt of 120 real estate firms has jumped from Rs 59,331 crore in 2011-12 to Rs 83,230 crore in 2015-16.
This sharp rise in debt, coupled with anaemic sales, has meant that the capacity of realty firms to service their debt obligations has deteriorated. As shown in chart 5, the interest coverage ratio for 120 firms has declined from 2.5 in 2011-12 to 1.79 in 2015-16, showing the reduced capacity of firms to service their interest obligations.
As shown in chart 1, sales in the top eight cities of the country dipped to 135,016 units during the first half of 2016 (January to June), from 141,341 units during the second half of 2015 (July to December). This has led to only a marginal decline in unsold inventory, which Knight Frank estimates, has fallen from 714,972 units in the second half of 2014, to 660,239 units in the first half of 2016.
Unsurprisingly, developers have postponed fresh launches, which have declined from 165,426 units two years ago to 107,120 units in the first half of 2016.
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However, despite sluggish sales in the major markets of the country, bank credit for home loans continues to exhibit robust growth, as shown in chart 2. This suggests that residential real estate may be doing better in smaller cities.
The muted sales in bigger cities are in spite of reduced prices. As shown in chart 3, CBRE Research estimates that over the past year, prices have corrected in all major cities, barring Bengaluru and parts of Hyderabad. Clearly, the quantum of price correction has failed to trigger demand.
With many new launches failing to take off, owing to lack of demand and delays in obtaining permission etc, the financial position of real estate firms has taken a turn for the worse. As shown in chart 4, the aggregate debt of 120 real estate firms has jumped from Rs 59,331 crore in 2011-12 to Rs 83,230 crore in 2015-16.
This sharp rise in debt, coupled with anaemic sales, has meant that the capacity of realty firms to service their debt obligations has deteriorated. As shown in chart 5, the interest coverage ratio for 120 firms has declined from 2.5 in 2011-12 to 1.79 in 2015-16, showing the reduced capacity of firms to service their interest obligations.