Second covid wave’s impact softer on residential real estate: Icra

Residential sale across the top eight cities in the April-June quarter fell 19% sequentially to 68.5 million sq ft due to the impact of the second wave. The sequential drop came on a high base of the fourth quarter of 2020-21, when the sector had witnessed its second highest sales since FY12.

Sales in the June quarter had, however, more than doubled from 33.7 million sq ft sales in the year ago-period.

Despite significant disruption in Q1 of FY22, underlying demand trend has remained intact, driven by factors such as multi-year low interest rates, demand for bigger residential space on account shift to hybrid work model, and pent-up demand.

These factors had also supported healthy sales recovery during the second half of last year, with added help from concessions on stamp duties and other incentives provided by certain state governments.

“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. The IT/ITES sector has witnessed robust financial performance with increased hiring, which supported the demand from employees in such sectors,” said Kapil Banga, sector head and assistant vice-president at Icra.

Preference for bigger and better homes has been supporting second-home purchases which had remained low in previous years. Though the second wave has dented the market following a good recovery curve in H2 FY21, a similar trend is expected in the second half of FY22 as well.

Icra noted that homebuyers have been leaning towards finished inventory and developers with an established track record of on-time and quality project completion.

This has also led to increased market share of the top nine listed realty players, from 6% of sales in FY17 to over 16% in FY21.

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.

With construction hit to some extent and decline in sales for the top nine listed players, collections declined 27% quarter-on-quarter. Further, extension in RERA timelines in certain states by six to 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, cash from operations for the larger developers have not suffered a steep decline. However, shrinking market share and cautious lending approach by non-bank lenders and housing finance companies may create a challenging operating and financing environment for small developers in the near term.

While 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.

“The home enquiries have increased post June 2021, 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,” Banga added.