Weakness in Mumbai luxury real estate to continue in FY20: ICRA

MUMBAI: Ratings agency ICRA expects the weakness in the luxury residential real estate in Mumbai to continue in 2019-20 on the back of liquidity pressure faced by developers and weak consumer demand.
Few developers with strong balance sheet, track record and group backing are expected to consolidate their position and market share during these testing times.

Residential real estate sector in India has been undergoing difficult times over the last few years and the luxury segment has been the most impacted segment. Various regulatory developments as well as market dynamics have been the reasons for weak performance of the luxury segment.

Incessant delays in delivery as well as high GST incidence resulted in change in trend in the industry from pre-booking of under construction homes to preference for ready-possession homes. This has translated into deferment of customer advances for the developers.

The NBFC crisis, which became prominent from second half of last fiscal, has further exacerbated the liquidity of the sector. High cost of land and construction, weak demand, back-ended customer advances, and limited avenues of external funding together have pushed the luxury residential real estate segment into distress

“Mumbai is one of the largest markets for the luxury residential real estate in the country. In line with strong growth commercial activity in central Mumbai areas like Worli, Lower Parel and Prabhadevi, demand for luxury residential segment had started to pick up in the past. Many developers, including the organised ones, beefed up the supply in the micro market expecting further boost in demand. However, due to weakened demand for over the last two to three years, central Mumbai has witnessed significant high value inventory build-up,” said Anand Kulkarni, Assistant Vice President and Associate Head – Corporate Ratings, ICRA.

According to ICRA, various measures like reconfiguration of apartments to reduce ticket size, association with stronger developers will help the stressed developers to liquidate the inventory gradually. However, maintaining supply discipline remains critical to strengthen the bargaining power of developers.

As per ICRA, central Mumbai micro market has 33% share of total apartments, out of which 70% is contributed by tier-I developers.

The unsold inventory in most of the markets in Mumbai is high at present and it stands around 52-54% (of launched areas) across all the micro markets. Central Mumbai contributes to 32% of total unsold inventory in Mumbai city, however, in terms of value of inventory, the share is much higher at around 55% and more than 70% of it is from tier-I developers.

The ratings agency estimates that the value of unsold inventory in central Mumbai is at Rs 45,000 crore as on June 2019. Considering the high value of inventory in the micro market, its underperformance has severely impacted the real estate sector in Mumbai.

Demonetisation in November 2016, RERA implementation starting from May 2017, GST implementation starting from July 2017 followed by various changes in GST rates had been the key developments which have impacted the market over the last few years. In the near term, the trends of deferred buying and back-ended payments from customers in the luxury segment are likely to prevail. Ends