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  • Lower impact of second wave of the pandemic on residential real estate sales; recovery likely in later part of FY2022: ICRA

    Published on September 2, 2021

    • Covid-19 has disrupted residential property sales in Q1 FY2022 with area sold in top eight cities dropping from 84.7 msf in Q4 FY2021 to 68.5 msf in Q1 FY2022
    • Nonetheless, underlying demand drivers remain intact and sales are likely to revert to earlier levels in the later part of FY2022, similar to the recovery witnessed in H2-FY2021

    The sales in the residential realty sector across the top eight cities of the country in Q1 FY2022 dropped 19% to 68.5 msf from 84.7 msf in Q4 FY2021 due to the second wave of the pandemic. The sequential drop of 19% comes on a high base of Q4 FY2021, in which the sector witnessed its second highest sales, since FY2012. However, residential sales more than doubled when compared to the 33.7 msf sales recorded in the corresponding quarter of the previous year, Q1 FY2021. As per ICRA’s analysis, with the increased focus on vaccination by the Government and quick re-opening of the economy, unlike last year, sales are likely to recover to the earlier levels in the short-to-medium term. This is due to the fact that  despite the significant disruption in Q1 FY2022, the underlying demand trend has remained intact, driven by factors such as multi-year low interest rates, demand for more residential space on account shift to hybrid working model, and pent-up demand. These factors had supported healthy recovery in sales during the second half of FY2022, with the recovery being aided to some extent by concessions on stamp duties and other incentives provided by certain state governments.

    Throwing more light on the trend and outlook, Mr. Kapil Banga, Sector Head & Assistant Vice President at ICRA, said: “The impact of the second wave has been lower than that witnessed in the first wave due to various factors including the continuing work-from-home by many salaried employees, more localised lockdown restrictions and higher degree of certainty regarding future income levels and stability. In particular, the IT/ITES sector has witnessed robust financial performance with increased hiring, which supported the demand from employees in such sectors. The preference for bigger and better homes is also supporting second-home purchases which had remained low in the previous years. Though the second wave has dented the market following a good recovery curve in H2 FY2021, a similar recovery curve is expected in the second half of FY2022 as well.”

    ICRA further notes that the home-buyers have been leaning towards completed inventory and towards developers with an established track record of on-time and quality project completion. This has led to increased market share of top nine listed realty players, from 6% of sales in FY2017 to over 16% in FY2021. The long-term trend of consolidation in the market, which has been a result of evolving consumer preferences as well as a sustained increase in market share of large developers among recent launches, is  likely to continue and will support further improvement in the market share of larger and stronger developers. 

    Trend in Sales – Top Eight Cities

    Source: Liases Foras, ICRA Research

    Trend in Sales – Key Listed Developers

    With the resurgence of the second wave of Covid-19, housing enquiries and site visits fell in the top eight metro cities and new housing project launches dipped by over 12% Q-o-Q basis; nonetheless the launches have increased three-fold when compared to corresponding quarter previous year.

    Further, on a Q-o-Q basis, the inventory overhang has risen due to the impact of the pandemic. The unsold inventory stood at 1057 msf as on June, 2021 and with the current sales velocity, it will take 3.9 years to sell the unsold stock, an increase from the years to sell (YTS) of 3.2, as per Q4 FY2021 sales velocity.

    Trend in City-wise Unsold Inventory and Years to Sell in Top eight cities

    Source: Liases Foras, ICRA Research

    With construction impacted to some extent and decline in the sales for the top nine listed players, the collections also got impacted, registering a decline of 27% quarter on quarter. Further, extension in RERA timelines in certain states by six-nine months along with reduction in the approval costs/construction premiums etc. provided by certain states for a limited period has provided flexibility to defer outflows in case of weakness in collections. Thus, notwithstanding the moderation in collections, the cash from operations for the larger developers have not witnessed a steep decline. However, shrinking market share and cautious lending approach by NBFCs / HFCs may create a challenging operating and financing environment for small developers in the near term. While the larger, organised players have maintained considerable liquidity buffers, and have better cash flow adequacy ratios, together with high financial flexibility, smaller players would find it difficult to cope with the prevailing market conditions.

    Concludes Mr. Banga, “The home enquiries have increased post Jun-21, while the fundamental demand drivers remain intact with the gradual pick-up in economic activity after the second wave and would serve as key enablers of the recovery of sales in the residential realty industry. As the larger developers resume their launch of new projects, which had been temporarily impacted in Q1 FY2022, their share of sales is expected to continue to improve within the overall residential real estate sales.”