The residential real estate sector in India continues to experience demand headwinds marked by declining trend in sales volumes and value. ICRA’s research of the sales volumes of a sample set of developers shows that although Q1 FY2018 aggregate sales volumes have improved over the previous quarter, the growth is not broad-based. Majority of the companies in the sample set have reported a decline in sales volumes during the quarter, compared to Q4 FY2017.
Giving more insights, Shubham Jain, Vice President and Sector Head, ICRA, says, “While the impact of demonetisation on the industry has been gradually waning, the implementation of RERA and GST over the first half of FY2018 has created short term disruption in sales volumes of many developers. Moreover, the industry faces demand headwinds on account of subdued macro-economic environment and consumer sentiment. What provides a ray of hope is the growth in volumes reported by a few developers which could be indicative of the scope for organised players to consolidate their market share under the new regulatory regimes of RERA and GST.”
ICRA research’s sample set further indicates that the sector continues to witness declining sales velocity. Aggregate value of new sales bookings of Rs 20,100 crore in FY2015 declined by 6.9 per cent to Rs 18,716 crore in FY2016; and further to Rs 12,404 crore in FY2017, registering a sharp decline of 33.7 per cent over the previous year. The decline in FY2017 was marked by 27 per cent and 9.1 per cent reduction in the area booked as well as the average sales realisation respectively.
In contrast, the aggregate sales value registered by the real estate developers in Q1 FY2018 has shown some positive trend. The value of sales has steadily improved from Rs 2,709 cores in Q3 FY2017 to Rs 3,310 crores in Q4 FY2017 and further to Rs 3,703 crores in Q1 FY2018 which is indicative of the waning effects of demonetisation on the industry. Nonetheless, a closer look at the individual performance shows that the improvement has not been broad-based and many developers have seen a decline in Q1 FY2018 sales volumes. The transition to the GST and the RERA regimes has impacted the sales performance of many developers during the first half of FY2018. While the RERA became effective from May 01, 2017, many states had delayed creating the required regulatory infrastructure. This resulted in deferment of purchase decisions. The GST implementation has also likely impacted sales performance in Q1 and Q2 of FY2018 due to confusion on impact of pricing on the end customer. But, with stabilisation of transition-related issues, upcoming festive season and low base of sales during the third quarter in the previous year, Q3 FY2018 is expected to be better for most developers.
Developers have continued their focus on execution and completion of projects. Project completion in the sample set increased from 40.04 million sq ft in FY2015 to 50.27 million sq ft. in FY2017. ICRA research expects completion of projects to help developers improve their sales velocity.
Concurs Jain, “Recent quarterly sales volumes for Q1 FY2018 have shown persisting weakness for most developers. Issues like RERA implementation, GST and economic uncertainty have resulted in purchase deferment by the buyers. At the same time, the performance of certain developers has shown encouraging trends in the recent quarters, which could be indicative of the expected trend towards consolidation of market shares under the new regulatory regimes. Concurrent pick-up in sales velocity and realisations across the board along with a reduction in quarters-to-sell (QTS) of inventory will be signs of recovery to watch out for.”
Further, there has been an increase in the value of inventory reported on the balance sheets of the sample set (which includes work-in-progress), from FY2015 to FY2017, as a result of continued project spend and reduction in sales volumes. The debt levels have also seen an increase during this period; however, the increase in debt has been relatively lower as reflected by the moderation in the debt-to-inventory ratio. This could be reflective of the lower land bank investments made in recent years and adequate collections from customers on the sold area. The debt-to-inventory ratio has remained steady at 0.59x at the end of March 2017 as compared to 0.60x noted a year ago.
Overall, ICRA research expects the developers to adopt caution with respect to new launches and continue their focus on completion of the under development projects as well as adjust their business models to suit the changing operating environments over the near to medium term.