Large listed residential realtors¹ will clock sales growth of ~25% on-year this fiscal and 10-15% on that high base next fiscal, a CRISIL Ratings study of 11 large listed residential developers indicates.

This is despite a moderation of up to 15% in affordability² since the second half of last fiscal — though it remains better than before the pandemic — as capital values and interest rates have increased, stamp duty has been reinstated in some places, and inflationary pressures continue.

Indeed, CRISIL Ratings expects residential prices to rise 6-10% this fiscal and a further 3-5% in the next across the top six cities³ because of a steep increase in raw material, labour and land costs, and relatively favourable demand-supply dynamics.

This, however, has not impacted demand for residences adversely, given a strong preference for larger homes as the hybrid working model continues in many sectors. To be sure, realtors in our sample set¹ reported sales of ~Rs 31,000 crore in the first half of this fiscal — equal to their entire fiscal 2020 haul — and should close this fiscal at ~Rs 65,000 crore this fiscal, up a whopping 110% compared with the pre-pandemic level.

Says Gautam Shahi, Director, CRISIL Ratings, “Large developers generally have a good track record of timely and quality delivery, which is why they are preferred by customers. Large realtors in our sample set will likely account for 40-45% of new launches this fiscal versus less than 30% before the pandemic This will mean an increase in their market share to ~24% this fiscal and ~25% by fiscal 2024 (see Annexure), compared with ~14% before the pandemic.”

Inventory levels in the top six cities have corrected to a comfortable 2.5 years on average, as against 4 years before the pandemic because of fewer launches in the past two years and faster sales momentum. Although new launches are catching up, healthy demand will keep the inventory levels in check over the next 2-3 years at 2.5-2.75 years.

Further, the composition of inventory has changed in the wake of the pandemic. Luxury inventory, or homes priced above Rs 1.5 crore, now comprise 40-45% in value versus 25-30% before the pandemic, while the share of affordable homes, priced below Rs 40 lakh, has declined to ~10% from ~30%.

This, too, has benefitted large developers, which have a smaller share of affordable homes. While launches in the affordable segment are expected to pick up, the mid-to-premium segment will dominate over the medium term.

Says Kshitij Jain, Associate Director, CRISIL Ratings, “Our sample set has also benefited from deleveraging. Strengthening of capital structure through equity raise and monetisation of assets worth ~Rs 18,000 crore over the last two fiscals have helped them sail through the pandemic. That, along with strong sales momentum, will improve their debt to total assets ratio⁴ significantly to ~23% by March 2023 and to ~21% by March 2024, from ~42% at the start of the pandemic.”

The surplus generated will help developers fund future launches and land acquisitions. Opportunities through joint ventures and joint development will help them sustain growth without compromising their credit risk profiles.

That said, the ability of developers to maintain a lean capital structure to tackle future downcycles will remain important, and any aggressive debt-funded growth will bear watching.

¹ 11 large and listed realtors in sample set include Brigade Enterprises Ltd, DLF Ltd, Godrej Properties Ltd, Kolte-Patil Developers Ltd, Macrotech Developers Ltd, Mahindra Lifespace Developers Ltd, Oberoi Realty Ltd, Prestige Estates Projects Ltd, Puravankara Ltd, Sobha Ltd, and Sunteck Realty Ltd.
² Affordability is measured through market specific average household income required to buy a house. For example, increase in interest rates increases the EMI burden on household to buy a house.
³ Mumbai Metropolitan Region, National Capital Region, Bengaluru, Pune, Hyderabad, and Kolkata
⁴ Debt to total assets ratio is used as a measure of leverage and is calculated by dividing outstanding debt with inventory, debtors and cash. The extent of leverage helps estimate not only the extent of future debt payment, but also the headroom to borrow further.