Mumbai: India’s real estate industry may witness the exit of weaker developers as a rise in interest rates and property prices deter buyers and crimp sales, Fitch Ratings said in a report.
Mumbai recorded a 16% drop in registrations in the year to 31 March, and sales may fall further across India’s major markets if developers hold on to prices, Fitch said. Fitch has rated its short-term outlook on the industry as negative.
“The slowdown will also aid the process of weeding out some of the weaker entities within the sector, and increasing the relative strength of some of the larger, more established developers,” Sandeep Mulik and Roopa Raman, analysts at Fitch Ratings, said in the report in Mumbai on Thursday.
Some developers face fund shortages and may tap buyout firms as investors sell real estate stocks on falling sales. Still, a prolonged slowdown may damp the appetite of private equity funds, forcing smaller developers to either borrow at higher rates or default on their obligations, Fitch said.
The central bank on 24 June raised interest rates to the highest in six years to contain inflation that accelerated to 11.63% in the week ended 21 June, the fastest in 13 years.
Bankers including O.P. Bhatt, chairman of State Bank of India and Keki Mistry, vice-chairman of HDFC Ltd, predict an end to the five-year rise in property prices.
Real estate shares have led a drop in Indian stocks this year. The Realty Index has fallen 62% since 1 January, against a 31% drop in the benchmark Sensex.
A dozen of the 14 property index stocks, including DLF Ltd, Indiabulls Real Estate Ltd, and Unitech Ltd, have more than halved this year.
A decline in demand prompted DLF and Unitech, the largest developers, to delay selling shares in investment trusts in Singapore.
“The sharp increase in construction costs, driven by increased steel and cement costs, could also impact margins and, hence, liquidity,” the Fitch analysts said. “The risk would be higher for real estate companies with a limited track record and limited cushion for debt financing.”
Fitch also expressed concern at the high prices paid by some developers for acquiring land.