The interest rate hike cycle by the Reserve Bank of India (RBI) has made home loans costlier for residential property buyers. But it also means an increase in the cost of borrowing for real estate developers. The accompanying chart shows that the cost of borrowings for many listed realty companies increased gradually in the December quarter (Q3FY23) as compared to the previous two quarters.
But not all realty companies are likely to be worried about this. An increased focus on reducing debt aided by decent pre-sales and improving cash flows is helpful here. Analysts at JM Financial Institutional Securities Ltd said in a March 6 report, “Without any major balance sheet stress, developers also remain open to right pricing of the product and focus on velocity rather than value addition.” “
View Full Image
That said, there are some companies that saw their debt increase sequentially in Q3 due to expansion/land related investments. In this case are Godrej Properties Limited and Oberoi Realty Limited. For them, rising borrowing costs are not desirable. Besides, the RBI has left room for further rate hikes. This is a risk as more rate hikes would mean that the cost of borrowing for the sector would go up further.
So far, despite rising home loan rates, residential real estate sales have not taken off. As per the Q3 management comments of leading listed developers, the launch pipeline for the coming quarters is strong. As of now, the important parameter of net debt-to-equity ratio, is in a comfortable position for many listed realty companies. However, looking at the launch plans, debt may be required to fund these projects, hence investors need to closely monitor the trend here.
Unfortunately, sentiment towards real estate stocks has turned sour amid rising interest rates. Gains from sector tailwinds such as lower home loan rates and stamp duty have waned. Overall, retail inflation remains high and stable. This is already hurting demand in some discretionary categories. Even though realty sales have shown resilience so far, investors are still jittery. So far in 2023, the Nifty Realty index is down 5%.
To be sure, for now, while leverage is not an issue for many realty companies, a re-rating is unlikely and largely depends on the sustenance of the ongoing sales momentum.
“The peak of the interest rate cycle may be a few quarters away, hence the market remains in wait and watch mode,” JM Financial reports.
Know your inner investor
Do you have guts of steel or are you a victim of insomnia regarding your investments? Let’s define your investment approach.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.