Organised realty players better positioned to tackle Coronavirus crisis

Range-bound prices and low home loan rates are also expected to further support sales for these players once the impact of the pandemic begins to recede, according to ICRA.

Notwithstanding the adverse impact of Covid-19 on real estate, most large and organized realty players with established brands, low leveraged balance sheets and adequate liquidity are better positioned to tackle the pandemic as against the smaller players, who have been finding it difficult to cope with the prevailing market conditions. Large players are also expected to benefit from the likely acceleration in consolidation in the residential real estate segment. Range-bound prices and low home loan rates are also expected to further support sales for these players once the impact of the pandemic begins to recede, according to ICRA.

Commenting on the same, Mahi Agarwal, Assistant Vice President and Associate Head at ICRA, said, “Home-buyers had already been leaning towards developers with an established track record of on-time and quality project completion, which had resulted in large, listed players reporting healthy sales and collections till 9M FY2020, despite the prevailing liquidity crisis and unfavourable supply-demand dynamics. The performance of these players was, however, adversely impacted by Covid-19 in Q4 FY2020, with Y-o-Y sales dropping by 11% in volume terms. Notably though, this decline remained significantly lower than the 30-40% Y-o-Y reduction witnessed in sales across key markets at an overall industry level.”

Collection levels for these larger, organized developers also remained stable. Their strong market position, together with their ability to switch to digital mediums for generating sales and maintain a positive customer experience, underpinned their relative resilience to the effects of the pandemic. “Going forward as well, their balance sheet strength and liquidity are expected to keep them better-positioned to absorb the cash flow disruptions arising from the outbreak,” she said.

ICRA notes that with the longer period of disruption in Q1 FY2021, however, sales and collections metrics are likely to show a higher impact relative to Q4 FY2020, both for listed players, as well as for the industry as a whole. The ongoing economic uncertainties have led to reduced discretionary demand from home-buyers, and also resulted in an increased focus on conserving liquidity, leading to deferment of new purchases and delays in meeting payment demands raised by developers in recent months.

Although certain developers with adequate project portfolio flexibility have responded to the slowdown by making payment structures more attractive and offering sales schemes in order to offload unsold inventory, a significant reduction in the overall sales traction remains likely. Cancellations are also expected to increase, especially for more recently launched projects with lower customer advance build-up.

Thus, overall operating cash flows for most developers, including the listed players, are expected to witness significant moderation in the current year, resulting in increased reliance on available liquidity and/or refinancing to meet committed outflows. The larger, organized players have, however, maintained considerable liquidity buffers, mostly in the form of free cash/liquid balances and undrawn bank lines, which can be used to meet debt obligations, despite a reduction in collections and operating cash flows, although the undrawn bank lines may have some conditions associated with disbursement.

The coverage on debt obligations from cash and liquid balances alone is sufficient to meet more than the entire year’s principal and interest payments for around 56% of ICRA’s sample set of listed players. Moreover, most of these developers also have low levels of leverage and enjoy high financial flexibility, which would provide significant support in managing event-related shocks.