Boost in Home Sales and Collections Helps Ease Rising Debt in Real Estate

The real estate sector is experiencing a notable improvement in financial performance and operations. According to the rating agency ICRA, real estate developers are projected to experience a 19-21% increase in collections from bookings compared to the previous year. Furthermore, operational cash flows are expected to grow by 9-11%, indicating a robust outlook for the industry. This surge in sales and collections reflects a broader trend of record-breaking home sales, which are buoying the overall health of the sector.

The current fiscal year is particularly noteworthy for real estate developers, who are capitalizing on the market momentum by increasing borrowing to acquire land for new projects. This strategic move is essential for developers to expand their project portfolios and meet the growing demand for residential properties. ICRA anticipates a 6-7% increase in gross debt for these companies this year, which is a calculated risk aimed at fuelling growth and development. In addition to land acquisition, developers are also securing more construction debt financing to support project execution. This approach ensures that they have the necessary capital to deliver on their project commitments and maintain the pace of development.

Several prominent real estate companies have successfully managed their debt levels, positioning themselves favourably in the current market landscape. Companies such as Sobha Ltd, DLF, and Macrotech Developers have reduced their previously high debt levels to more manageable amounts, particularly before the recent residential market surge. In FY23, the total debt of the top-listed companies dropped to ₹30,000 crore, a testament to their effective debt management strategies. Although there has been a rise in borrowing for business development and new project launches, the credit metrics remain favourable due to strong underlying cash flows. The leverage ratio, a key indicator of financial health, currently stands at a healthy 1.5-1.6 times, underscoring the sector’s stability and resilience.

Godrej Properties serves as a compelling example of a company navigating the complexities of debt and growth. The company has experienced a more than 40% year-over-year increase in net debt and a nearly 20% increase from the previous quarter, reaching ₹7,432 crore in the first quarter of FY25. Despite this rise in debt, Godrej Properties has also reported a remarkable 54% annual growth in collections and operating cash flows. This dual growth in debt and cash flows highlights the company’s ability to leverage debt for expansion while maintaining strong financial performance. The company’s leverage ratio now sits comfortably below 2.5, indicating a prudent balance between debt and equity.

DLF, another major player in the real estate sector, has undergone a significant transformation. Previously struggling with high debt levels, DLF has now transitioned to a net cash position, showcasing its financial turnaround. Additionally, DLF’s rent-producing division has also seen a reduction in debt, further enhancing its financial stability. Macrotech Developers, on the other hand, has seen its debt levels increase by ₹1,300 crore in the first quarter of FY25. This increase in debt, accompanied by a rise in the debt-to-equity ratio from 0.17 last year to 0.24, is primarily due to construction expenses, business development, overheads, and a sequential decline in collections. However, Macrotech Developers has a robust pipeline of upcoming projects for the rest of the year, including 18 projects across 10 million square feet and a gross development value of ₹12,000 crore. The company is expected to generate nearly ₹900 crore in free cash flows in the current fiscal year, reflecting its strong operational capabilities and financial planning.

A recent report by JLL and Propstack projects that the residential real estate sector will require ₹4.3 lakh crore in long-term debt by 2026. This forecast highlights the necessity for ongoing investment and financing to address the increasing demand for housing. The report suggests that while debt levels may rise, sales are also expected to increase as companies launch more projects to cater to the growing market. According to ICRA estimates, residential sales in FY25 in the top seven cities are expected to approach 800 million square feet, with launches just slightly less.

This anticipated growth in sales and launches indicates a vibrant and dynamic real estate market that is poised for sustained expansion.

In FY24, residential sales reached 714 million square feet, marking a significant milestone for the industry. This achievement reflects the sector’s resilience and adaptability in the face of economic challenges and uncertainties. The impressive sales figures highlight the ongoing demand for housing and the successful strategies employed by developers to attract buyers. As the real estate market continues to evolve, developers are likely to focus on innovation, sustainability, and customer-centric approaches to maintain their competitive edge and meet the changing needs of consumers.

In conclusion, the real estate sector is on a growth trajectory, supported by strong sales, increased collections, and prudent debt management. Companies are strategically leveraging debt to fund new projects and capitalize on market opportunities. With favourable credit metrics and a healthy leverage ratio, the industry is well-positioned to navigate the challenges and uncertainties of the market. As demand for housing continues to rise, developers are poised to launch more projects and drive the sector’s growth in the coming years.