Global rating agency Fitch on Monday said the likely upturn in the country’s investment climate and reduction in interest rates will improve the property market by the end of March 2016 and provide relief to the debt-ridden developers.
“The property development sector (will) be a key beneficiary of reductions in housing loan interest rates by several domestic banks in April 2015,” the agency said, adding that they would also boost credit growth.
Besides, the Reserve Bank has reduced the key policy rate by 0.50 percent since January, prompting commercial banks to cut interest rates for home loan and other borrowers.
“We expect property developers with a greater exposure to the middle and lower income segments to benefit more from lower domestic interest rates,” it said, adding that developers with a greater mix of high-income customers, such as Lodha Developers and Indiabulls, will be less impacted because their customers are less sensitive to market interest rates.
Both the companies, it said, would meaningfully reduce the portion of debts by end 2016. The rating agency observed that “the process of reducing leverage (debts) stalled in 2014 due to weak sales and slower cash collections on properties that were sold towards the end of 2014 and in early 2015, as developers introduced easy payment schemes to stoke demand.”
Earlier in the month, Fitch raised its forecasts for India’s GDP growth to 8 percent for the current fiscal, up from 7.4 percent in 2014-15, and 8.3 percent for 2016-17.
Domestic property purchases remained weak in 2014 due to high interest rates and some political and policy uncertainty in an election year, it said, adding that several buyers postponed their purchases, which drove up inventory levels steadily during the last 12 months.
Most developers, Fitch said, responded by introducing easy payment plans for certain products. These payment plans typically require 20 percent of the property price to be paid upfront and the remainder at the end of construction, usually several years later.
This has lengthened cash collection cycles and contributed to higher leverage. Fitch estimates that around 20 percent of the sector’s sales over the last two fiscal quarters were financed by easy payment plans and observed “the longer cash collection cycle will continue to weigh on developers’ balance sheets in the near term.”
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