Real estate companies reduce debt by 37% after covid

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Real estate developers, mainly in the listed space, are gradually reducing their debt. On a global basis, the top 10 listed developers in India were able to reduce their consolidated net debt by 37% for ??27,400 crore between March 2020 and June 2021, according to ICICI Securities.

This was achieved through a combination of reducing the cost of debt by 80-160 basis points (bps), reducing the company’s overhead costs by 20-40% from pre-Covid levels, ” excess cash from operations, asset sales and capital increases either through the QIP path or through dilution at the special purpose vehicles (SPV) level, said Adhidev Chattopadhyay, analyst at ICICI Securities .

“As the entire real estate industry in India, especially the unlisted space, continues to grapple with high cost and high debt, the balance sheets of listed developers have become leaner and put them in a strong position to invest for medium-term growth and is likely to accelerate the pace of consolidation in the sector, ”he added.

With favorable factors such as healthy balance sheets, access to capital and many unlisted and weaker developers being excluded from the market, the market share of large organized developers is expected to increase further over the next two to three years, according to the report. brokerage firm.

Most of the developers in the space listed have aggressive launch plans starting in the second half of FY22 and are looking to grow at a double-digit sales value CAGR over the next two to three years. which will lead to market share gains assuming the size of the industry remains stagnant.

After a collapse in real estate stocks, the sector is picking up steam with the BSE Realty index rising nearly 25% last week. The recovery in the economy, declining cases of covid and residential launches during the holiday season are expected to keep the sector attractive, analysts said. Low interest rates on home loans also contributed to sentiment about housing demand. While initial expectations were for residential launches to start from October to coincide with the start of the holiday season, the decline of the second wave of covid, record mortgage rates and strong hiring / salary growth in the IT / IT sector has led developers to progress. numerous launches through August-September that generated strong demand from buyers, ICICI Securities said.

Chattopadhyay expects real estate momentum to continue in the third quarter of FY22 (Dusshera and Diwali festivals) and believes developers will show record numbers of sales bookings in the second half of FY22 thanks to the launches. He sees the pan-Indian residential market share of companies covered by the brokerage firm grow from 25% in FY21 to 29% in FY24.

As the holiday season approaches in India in the second half of FY22, the listed developers have lined up a number of launches in Tier I cities. Stable real estate and strong employment prospects for IT / ITeS and financial services, particularly in South India, and continued work from home are expected to support residential housing demand.

Based on channel checks by ICICI Securities and feedback from developers in our hedging universe, most launches in September received strong customer response, with developers keeping pricing discipline with price hikes of 4 to 5. % on a comparable basis in new phases of ongoing projects and record mortgage rates of 6.5-6.7% for home loans.

The affordability of residential homes is also becoming attractive due to low mortgage rates and stable prices. Mortgage rates offered by most major lenders are between 6.5 and 7.0% for 20-year home loans and are the lowest on record since 2005. 7.5-8.0% (assuming a increase of 100 basis points) are still affordable and would not significantly impede purchasing decisions, ”added Chattopadhyay.

Others agree. Sharad Agrawal, Executive Director – Capital Markets, Knight Frank India agrees that leading developers have used the pandemic period to consolidate their grip on the market by gaining market share, as Tier 2/3 players continue to deal with liquidity issues, stalled projects and weaker sales and collections.

“The biggest players also reduced their debt during this period and also reduced their cost of borrowing, positioning themselves to take advantage of the post-covid rebound in demand. Developers reduced their debt through capital increases, asset sales, equity dilution, and lower corporate overheads. They are now well placed to invest in growth and gain market share. The housing cycle appears to have reversed, with residential demand returning strongly to the market thanks to strong hires by technology companies, a steady reduction in unsold inventory, record mortgage rates and government support, ” Agrawal said.

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