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Real estate price growth is slowing, but non-metros are doing well in terms of affordable housing.
Data released last week by the Reserve Bank of India (RBI) show that housing, as an asset class, is not doing very well. For the quarter from April to June (Q2 2018), the average price of homes throughout India has increased by 5.3% from one year to the next. other, against 8.7% a year earlier and 6.7% in the first quarter of 2018.
Does this imply a slower expansion of demand relative to supply, leading to a cooling of prices?
One could have thought that the gradual improvement of new launches in June, after a lull of 12 months, would also have increased demand. However, sales continued to be shy, with the exception of an increase in the affordable housing segment.
According to Nomura Securities Ltd: "Housing as a class of assets underperformed due to high interest rates, declining inflation, concerns over the past year. affordability and efforts by the government to increase transparency. "
By corroborating this, the RBI data show a slowing of the rate of price growth. From an average annual increase of 18% between 2010 and 2015, the price increase in the first six months of the current year has fallen to 6%. In addition, growth expectations weakened after the liquidity crisis created by rising insolvencies and non-performing assets in non-bank financial corporations (NBFCs) and banks. A report from Credit Suisse points out that NBFCs and housing finance companies (HFCs) have played a major role in the credit supply in recent years, accounting for 25 to 35% of the total additional credit. Although bank credit growth has averaged 7% over the last two years, strong NBFC credit growth of 20% or more has allowed overall credit expansion to exceed 10%.
The situation could be slightly better in non-metropolitan cities, where the government's efforts for affordable housing stimulated growth, as well as sales of low-cost homes.
That said, the real estate sector has a strong correlation with the availability of credit, both in terms of retail borrowing and corporate debt. Thus, any tightening of credit in the economy or any rise in interest rates would affect demand growth.
Indeed, the central bank's decision to boost credit growth in NBFCs / HFCs is positive. However, in the current scenario, where real estate sales have been extremely slow and many projects have fallen behind, banks may not be willing to lend.
In addition to weak residential sales, higher input and promotional costs, as well as compliance costs, would put increased pressure on Ebitda margins (earnings before interest, taxes, depreciation and amortization). . The sudden and brutal drop (20-30%) in real estate stock prices, following the collapse of the NBFC and the banking sector, is therefore not surprising.
That said, there could be exceptions to such forecasts. The listed real estate developers, such as DLF Ltd, Phoenix Mills Ltd., Oberoi Realty Ltd and Godrej Properties Ltd, who have reduced their debt or have a reasonable presence in commercial or retail assets, or who are highly exposed to Housing growth has been higher, could emerge stronger as they overcome challenges.
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