Structural changes required to reboot real estate sector in 2017-18: India Ratings

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MUMBAI: Real estate sector needs to undergo a structural change in the way it does business to revive itself and move towards a model of unit sales post completion of projects, said India Ratings and Research.

The ratings agency has a negative outlook on the real estate sector for 2017-18, based on the expectation of a continued slump in the sale of residential units. This will result in continued negative cash flows and a further increase in already-high debt levels, resulting in the weakening of the sector’s credit profile.

Real estate sector needs move towards a model of unit sales post completion of projects. Such a structure would favour large organised real estate companies having better access to institutional funding and lead to consolidation in the sector.

A single window system for time-bound approvals is imperative for the success of any such structural changes in the system and for the sector’s long-term survival and growth, said India Ratings and Research.

“The sale of residential units has been falling since 2013-14 due to the continued high prices of residential units making them unaffordable to end-users and the significant delays in the completion of under construction projects and sometimes by even more than three years, thus impacting consumer confidence in the sector,” India Ratings and Research said. “The sale of units to individuals who purchase residential units for investment purposes is also likely to be severely curtailed by the demonetisation exercise, the implementation of the Prohibition of Benami Transactions Act and the proposal to restrict set-off of loss on rented properties against other income heads introduced in the union budget 2017-18.”

The continued fall in sales is likely to curtail liquidity, which will be further impacted by the likely implementation of the Real Estate (Regulation and Development) Act, 2016 during first half of 2017-18. While the sector has largely relied on refinancing to meet its debt servicing obligations, the ratings agency believes refinancing will increasingly become difficult with revival in sales unlikely.

A price correction and the consequent revival in consumer demand, resulting in a positive free cash flow and a reduction in debt levels could result in a stable outlook for the sector. Sale of land and commercial property assets, leading to a substantial reduction in debt levels could be a positive driver for issuer ratings, India Ratings added.