India's largest property developers will continue to face a challenging operating environment over the next 12 months-including weak cash flows, flat sales and stagnant prices, according to Moody's Investors Service.
''At the same time, despite the difficulties, we expect solid economic growth in India in 2014-15 to provide some support to housing sales, while the likely gradual easing of lending rates will also boost investor confidence and investment activity,'' said Vikas Halan, a Moody's vice president and senior credit officer.
''Cuts in interest rates by the Reserve Bank of India, if passed on by the banks, will filter down to the property market, reducing the cost of borrowing for developers as well as buyers, and supporting demand,'' said Halan.
''But high home prices and declines in savings rates will outweigh these factors, particularly in Mumbai and Delhi, while more generally, the property market in India exhibits a notable degree of variation in terms of affordability,'' Halan added.
With the challenges in the operating environment, developers such as Indiabulls Real Estate (B1 stable), Lodha Developers Private (Ba3 negative), Unitech (unrated), DLF (unrated) and Oberoi Realty (unrated) will experience relatively more pressure on sales and cash flow because they operate in Delhi and Mumbai, areas where prices are the highest.
In contrast, developers in relatively affordable markets like Bengaluru, such as Brigade Enterprises (unrated), Prestige Estate Projects (unrated) and Sobha Developers (unrated), should fare better, owing to stable demand for housing.
Moody's also notes that the ability of developers to execute projects across markets has been challenged in the past 2-3 fiscal years owing to delayed approvals and stretched liquidity. Such delays have slowed the flow of payments from homebuyers and reduced investor demand for new projects by locking up their capital and decreasing their expected returns.
Furthermore, the slow pace of off-take due to subdued demand has resulted in a significant increase in unsold inventory across markets, preventing developers from raising prices and resulting in lower sales volumes as well as depressed cash flows.
But, rather than reducing prices outright to drive sales volumes, developers will likely continue to modify their products and offer promotions.
On the other hand, consumer confidence will get a boost from the Real Estate (Regulations and Development) Bill, which seeks to set up a regulatory authority and introduce guidelines for commercial and residential development. Developers, however, face stricter terms over the receipt and use of cash advances, which will further weigh on cash flows.
Moody's believes that the bill promotes transparency, accountability as well as discipline in the industry, which is positive for buyers.
Further, provisions about the registration of projects, submission of approvals as well as adherence to timelines would help dissuade unorganised development, and thus would be a positive for the real estate sector.