Buyer preference for bigger, premium homes is big win for these 11 builders

Residential real estate developers are expected to clock 8-10% sales growth this fiscal, despite interest rates and home prices rising last fiscal, riding on 4-6% volume growth and a 3-5% increase in capital values, said rating agency Crisil in a report.

Buoyant residential demand across the mid, premium and luxury segments has already  resulted in robust sales growth in the

past two fiscals across Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, Pune, Kolkata, and Hyderabad.

A rating study of 11 large and listed and 76 small and mid-sized residential developers, accounting for 35% of the residential sales in the country, indicates that leverage and credit profiles of developers had strengthened, too, and should sustain over

the medium term.

The 11 large and listed realtors in the sample set are Brigade Enterprises, DLF, Godrej Properties, Kolte-Patil Developers, Macrotech Developers, Mahindra Lifespace Developers, Oberoi Realty, Prestige Estates Projects, Puravankara, Sobha, Sunteck Realty.

In fact, sales by these 11 large and listed real estate developers in the sample set rose 50% on-year last fiscal in value terms, while the area sold increased 20%. The higher realisation (Rs per square feet) for these developers reflects the preference for bigger and premium homes.

According to Crisil, these large developers are well poised to increase their market share to 30% this fiscal from 16-17% in fiscal 2020, enabled by continued strong sales and collections from their ongoing projects, easier access to bank finance and capital markets, and increasing consumer preference towards reliable and reputed brands.

"Healthy economic growth and offices continuing with hybrid working model is keeping demand for residential real estate steady this fiscal, especially for bigger and premium residences. This demand is expected to hold firm at 8-10% despite rise in interest rates and capital values for the aforesaid reasons," said  Aniket Dani, Director, CRISIL Market Intelligence & Analytics.

The demand momentum is expected to continue on the back of inventory being at comfortable levels of around three years of sales on an average as against 4.5+ years before the pandemic, said Crisil. 

Not surprisingly, between January 2022 and May 2023, there were over 100 land transactions covering an area with a development potential of 209 million square feet, according to data provided by consultancy firm JLL India. 
 

At least 84 per cent of this was for residential projects with a development potential of 165 msf and sales potential of Rs 1.2-lakh crore. Over a fourth of the land deals were transacted in the first five months of 2023, the data showed.

Delhi NCR, Chennai, Mumbai Metropolitan Region, and Bengaluru lead in terms of total land area transacted (about 1,576 acres), accounting for a 72 percent share. With a development potential of around 150 msf, the land was acquired in 79 separate deals.

Real estate developers who actively acquired land includes Godrej Properties, M3M, Max Estates, Birla Estates, and Mahindra Lifespaces, among others.

"Over 100 land transactions with a development potential of 209 million sq ft in the last 17 months is a visible indication of the positive sentiment for the real estate sector. Interestingly, most of the land transactions were for residential development due to the surge in demand,"  said Samantak Das, Chief Economist and Head of Research and REIS, JLL India.

Developers, therefore, are on a stronger footing with greater confidence on new launches getting absorbed in line with incremental demand.

Fresh real estate launches across India’s top seven cities grabbed a 41% share in first quarter of 2023, marking an increase from the 26% recorded in the same period four years ago, according to a report released by property consultancy firm Anarock last month.

Credit risk profiles of large developers have also benefitted from liquidation of inventory amid healthy sales growth in the past two fiscals. "With robust collections leading to reduced debt, their leverage has improved substantially with their debt to total assets ratio  expected at 20% by March 2024 compared with 45% at the start of the pandemic," said Pranav Shandil, Associate Director, CRISIL Ratings.

Debt to total assets ratio is used as a measure of leverage and is calculated by dividing outstanding debt with inventory, debtors and cash. The leverage helps estimate not only the extent of future debt payment, but also the headroom to borrow further.

 

The credit metrics of small and mid-sized developers have improved, too, with debt-to-total assets ratio expected at 45-47% by March 2024 as against 54% before the pandemic.

However, these smaller players rely more on debt and may need to tie up with larger developers for new launches to benefit from the latter’s superior execution ability, strong balance sheets and reputation of quality consistent with the brand image.