Interest cost for real estate agents falls to multi-quarter low
Listed real estate developers have tried to deleverage in recent quarters. Thanks to the lower cost of borrowing and improved cash flow, they have significantly reduced their debt. On an aggregate basis, during the December quarter (Q3FY22), the net debt of the top 11 listed developers declined by around 25% year-on-year (yoy) and 5% sequentially, IIFL analysts said. Securities Ltd in a February 17 report. .
This includes DLF Ltd, Macrotech Developers Ltd (Lodha), Godrej Properties Ltd and Prestige Estates Projects Ltd.
As a result, the sector’s interest expense declined. Analysis by BOB Capital Markets Ltd showed that real estate company interest expense as a percentage of sales declined from a recent peak of 37% in the June quarter 2020 (Q1FY21) to 11% in Q3FY22.
As real estate development is a capital-intensive business, a reduction in debt and interest payments bodes well for the strength of corporate balance sheets.
“For real estate developers, the drop in debt is very positive because it gives them comfort, especially on the side of the lenders (banks) because they always need funds for new projects. Also, with the decrease in debt, your credit rating would improve and thus reduce the cost of borrowing. Developers with improved credit rating could benefit from at least 50 basis points while raising new funds, and this number could be higher depending on the amount of debt relief,” said Abhishek Lodhiya, Senior Analyst at Yes Securities Ltd. One basis point equals 0.01%.
That said, the strong rise in real estate stocks seen last year seems to capture most of the positives.
Remember, the Nifty Realty Index was the second best performing index in 2021. Robust sales, healthy inflows and market share gains from covid-led consolidation kept real estate stocks in favor. Record mortgage rates and subdued house prices were among the factors that helped residential property sales last year.
Here, what will matter for real estate stocks is whether the momentum in demand seen in home sales last year will continue. The trajectory of new launches also remains to be seen.
“Channel checks indicate that some price increases have taken place, and that further increases may be in sight to offset cost inflation; the impact of these price increases on demand remains to be seen. Another revaluation would depend on it,” said an analyst at a national brokerage who requested anonymity.Year-to-date, mixed price increases in the listed real estate space have been modest, at around 5 to 6% for all developers, said the IIFL report.
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