Fitch gives stable outlook to realty market; unsold stock to drop

New Delhi: Rating agency Fitch has forecast a stable outlook for the Indian real estate and expects that unsold stock will fall from peak level and the sector will see consolidation with the implementation of a new regulatory law.

The Real Estate (Regulation & Development) Act, which was passed by the Parliament last year, has been implemented from May this year.

"We expect unsold inventory to fall in 2018 as most developers will focus on completing their property projects to comply with RERA," Fitch said in a statement.

The agency said the unsold inventory for a sample of seven large developers increased to Rs 668 billion at the end of 2016-17 fiscal from Rs 631 billion at the end of previous year.

Stating that RERA would drive consolidation in 2018, Fitch said the implementation of the new law would continue to reduce the pace of new launches as developers focus on completing existing projects.

The introduction of GST, while broadly neutral for the sector, is shifting demand towards completed properties as they attract lower taxes, the statement said.

"These trends will drive consolidation in 2018 - larger and more financially sound developers will survive, while smaller or highly leveraged companies will likely resort to asset sales to shore up liquidity," Fitch said.

On the Lodha Developers and Indiabulls Real Estate - the two companies which it rated - Fitch expects that the leverage of these two developers would remain steady in 2018.

"We forecast leverage will drop slightly to 68 per cent and 67 per cent at the end of 2017-18 and 2018-19, respectively compared with 70 per cent as of 2016-17," the agency said.

It also projected aggregate presales for the developers to rise to around Rs 140 billion in 2017-18 and over Rs 160 billion in 2018-19 from around Rs 95 billion in 2016-17.

"We don't expect the companies to spend on land banking over this period as they are likely to focus on completing existing projects where land costs have been incurred," the statement said.

On the cash flow generation of these two companies, it said that the same is 'negative but improving'. Fitch said their CFFO (cash flow from operation) of the rated Indian developers would continue to improve in 2018 on higher domestic presales in India and the completion of more of their existing projects.

"We forecast CFFO to remain negative, but improve to Rs 5.4 billion at 2017-18 end and Rs 862 million at 2018-19 end from Rs 12.8 billion at the end of 2016-17," it added.

However, Fitch said both developers could face weaker CFFO than expected if they choose to postpone the sales of their London projects for a longer period than anticipated in favour of higher profits.