Declining property sales coupled with stretched balance sheets is bound to remain a concern in the short-term, leading to a moderation in property prices in some markets, says a report by market research firm Knight Frank.
The report says the real estate sectorâ€™s ability to service debt is bound to determine the hold on price of new projects. While the debt-equity ratio at less than one indicates a comfortable leverage situation, the ability of operators to service debt has taken a beating,
According to the Reserve Bank of India data, as of June, outstanding bank credit to the real estate sector was Rs 5.31 lakh crore While 78 per cent of this exposure is towards the housing loan segment, the remaining 22 per cent have been to real estate developers.
An evident trend is the decline in banksâ€™ exposure towards commercial real estate lending. Growth has come down from 23.2 per cent in June 2011 to 4 per cent in June 2012, says the report titled â€śEconomy and Realty @ Glance.â€ť
The firm said that in the short-term, factors other than demand will influence the direction of property prices, given the declining sales.
Since January 2010, the RBI has increased the repo rate by 325 basis points. Coupled with the stringent lending norms for the real estate sector, this has sent the interest rate spiralling for the sector, it adds.
Between FY10 and FY12, although debt increased by a marginal 0.4 per cent, interest cost increased by a significant 81 per cent. Increase in project completions during the period also led to higher interest cost recognition, the report states, adding that the momentum of the industry has slowed with profitability taking an even bigger hit.
During the five-year period between FY-2008 and FY-2012, while sales value of the real estate sector had gone down 15 per cent, net profit dropped almost 67 per cent, primarily on account of interest cost going up five-fold.