Fitch Ratings in a Special Report, said that its 2010 Outlook for the Indian real estate sector remains Negative; however, the sector could exhibit signs of stability by the second half of the year. Fitch notes that the fundamentals of India’s real estate sector are improving, as seen by better liquidity and improved demand in the residential segment. The agency expects growth in 2010 to be driven by government support, especially for the affordable housing segment, improved access to debt and capital markets, and the recovery of real estate demand. Yet, there are concerns that the government may roll out moderately adverse policies to keep property prices in check when economic conditions become more stabilised. In addition, the government may also find it politically difficult to provide a supportive environment if developers continue to increase real estate prices.

In order for Fitch to take a more favourable view of the sector, sustainable operating performances and continued deleveraging by developers over a longer period will be key positive factors, which the agency expects to see during the second half of the year. Demand for both residential and commercial real estate segments slowed down considerably in H109, with a significant drop in property prices. However, H209 witnessed some revival, particularly in the residential segment. Enhanced affordability, lower mortgage rates, and better job security have helped revive demand for homes.

Conversely, demand in the commercial segment remains weak, primarily impacted by over-supply and the scale-back of expansion plans by corporate India. During the crisis, the Information Technology/Information Technology Enabled Services (IT/ITES) sector, where the bulk of the demand for India’s commercial office spaces come from, adopted a conservative staffing approach. This has led to demand lagging behind supply; however, Fitch expects demand for commercial spaces to improve in H210 consequent to the expected resumption of hiring in key sectors like IT/ITES and financial services. That said, based on the current commercial spaces under construction, oversupply risk persists in the sector, which would keep lease rentals under pressure in 2010.

The affordable entry or low-income housing segment is expected to remain the primary growth driver for the Indian residential sector in 2010, and its potential is supported by the government. Affordable housing will require better and more efficient construction practices from homebuilders to maintain overall operating margins, as this segment generally has lower margins and a shorter construction and sales cycle. These factors should also reduce working-capital requirements. A more favourable overall economic environment in India and improved market sentiment on the part of homebuyers should clearly have a positive effect on the credit quality of homebuilders.

Overall, credit metrics are expected to recover in 2010, as developers should be able to improve their capital structure, operating margins, and liquidity. Fitch notes that a substantial amount of equity funds raised has been utilised in the repayment of debt and interest costs, which has helped in developers deleverage. However, risks remain as significant repayments would be due in H2FY11 and FY12 from restructured loans. The ability of leveraged players to service their interest costs and fulfil their immediate term debt/land obligations continues to be a concern.

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