Real estate: Current sentiment pessimistic; project funding an issue

The cash-strapped real estate sector may not see a substantial improvement in funding for projects over the next six months, with 47 per cent of the respondents of a joint survey by Knight Frank and National Real Estate Development Council (NAREDCO) expecting the squeeze to continue. However, this is still an improvement, albeit marginal, over the 50 per cent and 53 per cent respondents expecting the squeeze to continue in the March 2020 June 2019 quarters, respectively.

“67 per cent of the respondents in the June 2020 quarter (Q2-2020) were of the opinion that the impact of the ongoing crisis on the economy might get worse or will continue to remain at the current levels in the next six months. With regard to funding, 47 per cent of the respondents in Q2-2020 expect credit availability will worsen for the real estate sector over the coming six months,” the Knight Frank - NAREDCO survey findings released August 3 suggest. This survey covering the period April – June 2020 was conducted in the first two weeks of July 2020.

In a separate report by the economic wing of State Bank of India (SBI), the realty segment was among the top sectors where players / companies opted for moratorium. “Sector-wise analysis, from a sample of more than 300 companies with total rated debt of around Rs 4 trillion by ICRA, reveals that metal and metal products, petrochemicals, Power, non-bank finance companies (NBFC) and real estate, textile etc. are the sectors that opted for loan moratorium in India. Real estate, though debt-equity ratio is less than 1, may need support as it will face demand-side issues and unsold inventory,” wrote Dr. Soumya Kanti Ghosh, Group chief economic adviser at State Bank of India in an August 3 report and pegs the rated amount at Rs 31,525 crore.

Sentiment score

Stalled construction during lockdowns, scarce availability of labour due to migration from urban to rural India, tighter lending norms and low demand on account of crisis-induced job losses and pay cuts are likely to have muted the developer community sentiment, the report said. As a result, the 'Current Sentiment' score dropped to its lowest levels at 22 in the June 2020 quarter.

“Market outlook had turned pessimistic in the previous quarter after the Covid-19 outbreak. March 2020 'Current Sentiment' score had hit a low of 31 then. As the impact of the ongoing crisis became more apparent in the June 2020 quarter, sentiment spiraled down further resulting in an even lower score in this quarter,” the Knight Frank – NAREDCO survey findings suggest.

That said, the 'Future Sentiment' score climbed up to 41 in the June 2020 quarter from 36 in March 2020 quarter, indicating that stakeholders’ sentiment for the future of real estate sector is improving. North India, according to the findings, is leading the zone-wise improvement in this 'Future Sentiment score.'

“With some of the macroeconomic indicators showing marginal improvement and with the impending festive season in the second half of the year, stakeholders have shown improved sentiment compared to the previous quarter, albeit they have remained in the pessimistic zone. At this juncture, we expect the lockdown to ease by the advent of the festive season, helping to revive economic activity and propel conversion of the pent-up demand,” said Shishir Baijal, chairman and managing director at Knight Frank India.

The Real Estate Sentiment Index, according to the Knight Frank - NAREDCO report, is based on a quarterly survey of key supply-side stakeholders, which include developers, private equity funds, banks and Non-Banking Financial Companies (NBFCs). The survey comprises questions pertaining to the economy, project launches, sales volume, leasing volume, prices and rentals, and funding. A score of 50 represents a neutral view or status quo; a score above 50 demonstrates a positive sentiment; and a score below 50 indicates a negative sentiment.