Fitch Ratings predicts inevitable competition among Indian realtors
Fitch Ratings is one of the premier ratings agencies in India and it has predicted immense competition amongst Indian developers owning to possible relaxation of FDI regulations.
Filch Ratings presages competition as inevitable if rules on foreign direct investments into India’s property development sector are relaxed. It would however be beneficial for the improvement of developer’s liquidity and would positively catalyze turnaround. The amendment of existing rules was approved by the Government of India on the 29th October. Amendment includes an allowance to from foreign developers to invest in smaller property development projects – with a minimum floor area of 20,000 square meters (sqm), compared to 50,000 sqm previously. The minimum foreign-investment threshold was also changed from USD10m to USD5m.
Project turnaround times and domestic developer’s liquidity will exponentially improve as a result of these amendments. It promises a liaison between the domestic developers and their foreign peers. India’s property projects are reported to have long interim periods compared to their counterparts in sundry Asian markets, resulting in higher leverage and weaker liquidity for most developers.
The average working capital cycles for Indian developers can be as long as five to six years. They expect leverage as high as 100%. Chinese property companies in comparison have average working capital cycles of less than two years, with leverage as low as 50%.
On the contrary, the relaxed rules imply a higher supply of property projects and intense price-competition among domestic developers- a detriment to profit margins. On the other hand, EBITDA margins have been reported between 25%-40%. Barring the level of competition, developers’ profit margins are dependent upon the market segments they cater to, the point in the economic cycle, and the average age of their ongoing development projects. A developer’s record of peerless high quality projects and punctual deliveries serve as cogent factors to aid differentiation by consumers in a competitive market.
As a result of such relaxation, developers may benefit immensely but may also fall prey to lower profit margins along with severe competition. It remains to be seen what impact possible FDI rule relaxations may have on the Indian realty sector.
Source:
Indian Realty News
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