The momentum in housing demand across India’s top six cities¹ is expected to continue this fiscal and grow 5-10% despite rising property prices, interest rates and a high-base effect.

The leverage and credit profiles of real estate developers, which had strengthened on the back of recovery in fiscal 2022, should sustain over the medium term.

CRISIL estimates housing demand rose a solid 33-38% last fiscal, surpassing pre-Covid-19 levels. But this was on a low base of fiscal 2021, when demand had fallen 20-25% (refer to annexure 1).

Affordability, after improving upto 20% between fiscals 2016 and 2021, had started declining from the second half of fiscal 2022. The headwinds now are higher capital values and interest rates, reinstatement of stamp duty, and the high-base effect of fiscal 2021, CRISIL Research’s proprietary MAHTI^TM Index² indicates.

Says Aniket Dani, Director, CRISIL Research, “We expect residential real estate prices to rise 6-10% across the top six cities this fiscal due to a steep rise in material costs and relatively favourable demand-supply dynamics, especially for established developers³. Some of them have started hiking prices by ~2% per quarter and may continue to do so over the next couple of fiscals to account for rising land prices. However, in spite of these headwinds, housing demand is likely to grow 5-10% supported by favourable demographics and urbanization.”

Inventory levels in majority of the top six cities are at a comfortable 2-4 years as against 3-5.5 years before the pandemic. The correction happened because of fewer launches in the past two years owing to the pandemic, and slower sales momentum. Although new launches are expected to catch up, healthy demand will keep the inventory levels in check over the medium term. This will be largely driven by established developers, which will benefit from the sales momentum, the shift in demand to organised players, sound balance sheets, and an asset-light approach.

These realtors will continue to gain market share, cornering 24-25% of the spoils by March 2022, compared with ~18% at the start of the pandemic. In fiscal 2021, their sales grew 13%, while the industry contracted 20-25%; in fiscal 2022, sales of these developers are estimated to have grown 35-40%, in line with the industry.

Says Kshitij Jain, Associate Director, CRISIL Ratings, “Established developers now have stronger balance sheets, reflected in a comfortable debt-to-total assets ratio of ~25% last fiscal versus more than 40% at the start of the pandemic (refer to annexure 2). They are also well-placed in terms of liquidity, having raised ~Rs 13,000 crore through both, equity and monetisation of land and commercial assets in the past two fiscals. Their improved financials will come in handy to fund growth and keep credit profiles stable.”

Small and mid-sized developers⁴, too, are seeing better days. Their balance sheets have improved, with their debt-to-total assets ratio falling below 50% in fiscal 2022 from 55-60% before the pandemic. However, these players have higher dependence on debt and may need to tie up with established players for new launches to benefit from the latter’s financial flexibility and strong brand.

CRISIL believes that strong demand, lower inventory levels and strengthened capital structures auger well for the industry. However, any aggressive debt-funded growth in the industry will bear watching over the medium term.

¹ Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Bengaluru, Pune, Kolkata, and Hyderabad
² MAHTI stands for Market-specific Average Household Threshold Income level to buy a house in a city
³ Sample of 13 CRISIL Ratings-rated or listed developer groups with networth and annual sales of over Rs 500 crore
⁴ Sample of 76 developers and single-project special purpose vehicle rated by CRISIL Ratings with networth below Rs 500 crore