Listed property developers have been on a debt reduction spree in recent quarters. Thanks to the lower cost of borrowing and improved cash flows, they have pared debt meaningfully. On an aggregate basis, in the December quarter (Q3FY22), net debt for the top 11 listed developers declined by around 25% year-on-year (y-o-y) and 5% sequentially, analysts at IIFL Securities Ltd said in a 17 February report.
This includes DLF Ltd, Macrotech Developers Ltd (Lodha), Godrej Properties Ltd and Prestige Estates Projects Ltd.
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Consequently, the sector’s interest outgo has reduced. An analysis by BOB Capital Markets Ltd showed that real estate companies’ interest cost as percentage of sales has eased from the recent peak of 37% in June 2020 quarter (Q1FY21) to 11% in Q3FY22.
Since real estate development is a capital-intensive business, a reduction in debt and lower interest payments bode well for companies’ balance sheet strength.
“For real estate developers, debt coming down is very positive as it gives them comfort, especially from lenders’ side (banks) because they keep needing funds for new projects. Also, with debt coming down, your credit ratings would improve and thereby reduce the cost of borrowing. Developers with improved credit rating could benefit by a minimum of 50bps while raising fresh funds, and this number could be higher depending on the quantum of debt reduction,” said Abhishek Lodhiya, lead analyst at Yes Securities Ltd. One basis point is 0.01%.
That said, the sharp up move in real estate stocks seen last year appears to be capturing most of the positives.
Remember that the Nifty Realty Index was the second best-performing index in 2021. Robust sales, healthy cash collections and market share gains from covid-led consolidation kept realty stocks in favour. Record low home loan rates and moderate real estate prices were among the factors that aided sales of residential property last year.
Hereon, what will matter for real estate stocks is whether the demand momentum seen in residential sales last year sustains. The trajectory of new launches also remains to be seen.
“Channel checks indicate that select price hikes have happened, and more hikes may be in the offing to offset cost inflation; the impact of these price increases on demand remains to be seen. A further rerating would depend on that,” said an analyst with a domestic brokerage house requesting anonymity. Year-to-date, blended price hikes in the listed real estate space have been modest at around 5-6% across developers, said the IIFL report.
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