Covid-19 impact: Residential realty sector stares at major liquidity crunch

Mumbai: Sluggish sales over the next few months due to the Covid-19 pandemic are expected to pose major liquidity and financing challenges for thousands of builders focused on the residential real estate sector across the country.

The segment, except for affordable housing, was already under pressure, generating negative cash flows from operations that resulted in higher leverage and increased refinancing risks for the builders.

Over the last two years, smaller developers had resorted to striking joint ventures and alliances with bigger peers to overcome this challenge, but now even the large developers are reviewing their growth strategies given the grim economic outlook.

“The bigger worry for the already weak and credit starved residential real estate sector is that it is likely to see increased cash flow gaps and liquidity pressure during the course of the year, as new sales and residential demand may take a further hit on account of the economic fallout from the pandemic,” said Harsha Sodhani, associate director at India Ratings and Research.

According to Sodhani, new sales and collections from already sold units could also slow down as housing finance companies as well as banks become more selective and tighten their home loan disbursements criteria.

Refinancing risk for the developers could increase as lender’s risk aversion to the sector increases.

Due to widening cash flow gaps, smaller developers will struggle to service debt and interest payments and that may prove to be an existential crisis for those who do not have new project funding lines, balance sheet liquidity or support from diversified operations.

Industry experts are of view that the change in business environment, led by scanty demand pattern and financing squeeze, would result in new partnerships and different power equations.