Residential real estate developers across the top six cities¹ of India are expected to clock 8-10% sales growth this fiscal, despite interest rates and home prices rising last fiscal, riding on 4-6% volume growth and 3-5% increase in capital values.

Buoyant residential demand across the mid, premium and luxury segments had resulted in robust sales growth in the past two fiscals. Leverage and credit profiles of real estate developers had strengthened, too, and should sustain over the medium term.

A CRISIL Ratings study of 11 large and listed² and 76 small and mid-sized residential developers³, accounting for 35% of the residential sales in the country, indicates.

Says Aniket Dani, Director, CRISIL Market Intelligence & Analytics, “Healthy economic growth and offices continuing with hybrid working model is keeping demand for residential real estate steady this fiscal, especially for bigger and premium residences. This demand is expected to hold firm at 8-10% despite rise in interest rates and capital values for the aforesaid reasons. The demand momentum is expected to continue on the back of inventory being at comfortable levels of around three years of sales on an average as against 4.5+ years before the pandemic. Developers, therefore, are on a stronger footing with greater confidence on new launches getting absorbed in line with incremental demand.”

In fact, sales by the 11 large and listed real estate developers in the sample set rose ~50% on-year last fiscal in value terms, while the area sold increased ~20%. The higher realisation (Rs per square feet) for these developers reflects the preference for bigger and premium homes (see chart 1 in annexure).

These large developers are well poised to increase their market share to ~30% this fiscal from 16-17% in fiscal 2020, enabled by continued strong sales and collections from their ongoing projects, easier access to bank finance and capital markets, and increasing consumer preference towards reliable and reputed brands.

Says Pranav Shandil, Associate Director, CRISIL Ratings, “Credit risk profiles of large developers have also benefitted from liquidation of inventory amid healthy sales growth in the past two fiscals. With robust collections leading to reduced debt, their leverage has improved substantially with their debt to total assets ratio⁴ expected at ~20% by March 2024 compared with ~45% at the start of the pandemic (chart 2 in annexure).”

The credit metrics of small and mid-sized developers have improved, too, with debt-to-total assets ratio expected at 45-47% by March 2024 as against 54% before the pandemic. However, these players rely more on debt and may need to tie up with larger developers for new launches to benefit from the latter’s superior execution ability, strong balance sheets and reputation of quality consistent with the brand image.

That said, sustenance of growth amid rising interest rates and related affordability challenges will remain key monitorables.

¹Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, Pune, Kolkata, and Hyderabad
²The 11 large and listed realtors in the sample set are 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, Sunteck Realty Ltd.
³ Developers rated by CRISIL Ratings with networth of less than Rs 500 crore
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 leverage helps estimate not only the extent of future debt payment, but also the headroom to borrow further.