Negative Realty Outlook for the Second Half of 2012: Fitch

Bangalore: For the second half of 2012, the real estate sector continues to face negative outlook due to slow demand, soaring construction costs and liquidity pressures, according to a report by Fitch Ratings.

According to the report, the caution stated by Reserve Bank of India (RBI) on interest rate cuts and high equated monthly installments (EMIs) will restrict prospective home buyers to buy property. "This, together with high property prices and elevated inflation, will keep demand sluggish," the report said.

However, over the past 12 months till April, the year-on-year growth of housing loans by banks had been slowed down and during May-June 2012, it picked up markedly and if the scenario remains the same then it may help stimulate the real estate sector.

Also, the economic slowdown and subdued job growth in the IT sector, which was marked as lowest during the April-June quarter will further restrict the demand for commercial and retail properties, said the report.

The real estate companies will be facing margin compression from soaring construction costs for building materials as well as labour.

The report shows that "From last December to this April, the price of steel rose 13 percent while cement by 12 percent. Notwithstanding the trend of deleveraging since the third quarter of 2011, slowing demand, high costs and thus declining profits will keep leverage high for most realty companies," as reported by PTI.

As the funding options which are available currently remains limited, the dependence of real estate companies on operating cash flow is supposed to gain more significance.

In the June quarter, the growth of bank lending was low at a percent of 1.5 year-on-year for the commercial real estate sector and the report said that "Except for some pick-up in private equity, other funding options are restricted. As a result, companies that derive significant revenue from lease rentals will have a more stable credit profile compared to their counterparts, whose business model is based on outright sale."