Slowdown Impacts Liquidity Profiles

Slowdown Impacts Liquidity Profiles

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The current slowdown in the domestic real estate market, prompted largely by a slowing economy, elevated property prices and high interest rates, has adversely impacted the liquidity profiles of real estate companies.

This along with the difficulty that all corporates in general and real estate players in particular are facing in raising funds, either through loans or equity, has significantly increased refinancing risks for such companies.

According to Anjan Ghosh, Analyst of ICRA, Over the past one year, demand for real estate has declined significantly in almost all the major markets in the country, with the economy slowing down and interest rates on home loans ruling high. Immediately prior to this, for a stretch of three to four years, interest rates had remained low, which along with growing disposable incomes and the easy availability of finance had encouraged home prices to chart a steep rise across markets.

This however has also had the effect of gradually making home purchase unaffordable for the middle class. Currently, while property developers are still holding on to these elevated prices, potential homebuyers are deferring purchase in anticipation of a price correction. Besides high prices and interest rates, another factor that has affected demand for homes during the past one year is the cautious approach that banks have adopted towards fresh disbursements.

As for commercial space, demand for the same has also been affected by the current slowdown in the economy and the global meltdown in the stock markets.

So far, demand for commercial space was driven largely by IT/ ITES1 and financial service companies expanding their operations.

Currently, with the economic cycle reversing itself, a slowdown in the growth of outsourcing services is anticipated, which in turn would impact the expansion plans of the IT/ITES sector.

Financial sector companies too have pared their growth plans, being faced with a tight liquidity situation and a dip in profits. This, along with the expectations of over-supply in many pockets within the country, can impact the occupancy levels and rentals of new commercial properties. The liquidity problem for commercial properties is aggravated by the fact that while the construction cost is up-fronted, payments from tenants/buyers are generally back-ended unlike in the case of residential projects where construction is partly funded out of customer advances, Anjal, said.

Published at: www.indiarealestateblog.com

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