The easing of liquidity is an encouraging trend

India Ratings, a credit ratings and research agency, has revised its outlook for the Indian real estate sector slightly, from negative to stable for 2013.

According to a press release from the firm, demand remains subdued and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amotization) margins low, leading to weak credit metrics for companies in the sector. The agency, however, sees signs of improvement, in terms of stability of margins and the easing of liquidity pressures, with free cash flows turning positive since H2FY12. Demand for residential real estate stabilised in 2012, with year-on-year growth in home loans from banks showing an uptrend from May 2012. However, the sales of large players declined marginally in 2012. Economic weakness continued with the associated apprehension of employee downsizing and salary freezes, which adversely affected consumer sentiments. Persistence of adverse sentiments, high inflation and high interest rates which reduce affordability, coupled with high property prices, continue to hinder improvement in demand.

Commercial demand will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 has been 28-32 per cent lower than the previous two years. Demand for retail space is likely to be muted in the near term.

An encouraging trend noted by India Ratings is the easing of liquidity pressures. In FY12, companies generated positive free cash flows and the trend continued into H1FY13.

Apart from stable demand, other efforts to improve liquidity included strategies like monetisation of land and non-core assets.