The relaxation of rules on foreign direct investments into India’s property development sector, will improve developers’ liquidity and speed-up project-turnaround times, but may also increase competition, says Fitch Ratings.
Fitch Ratings says that, the relaxation of rules on foreign direct investments into India’s property development sector, will improve developers’ liquidity and speed-up project-turnaround times, but may also increase competition, says Fitch Ratings. The Government of India approved the amendment of existing rules on 29 October. Key amendments include allowing 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 lowered to USD5m per project, from USD10m.
These moves may encourage more foreign developers to tie-up with their domestic counterparts, which will improve domestic developers’ liquidity and speed up project turnaround times. India’s property projects typically have long gestation periods compared to peers in a number of other Asian markets, resulting in higher leverage and weaker liquidity for most developers. Indian developers’ average working capital cycles can be as long as five to six years, and with leverage (defined by Fitch as net debt / adjusted inventory) as high as 100%. Comparatively, most Chinese property companies have average working capital cycles of less than two years, with leverage typically well below 50%. Indian developers’ limited access to capital compared to Chinese peers, and India’s slower approval processes for the purchase and development of land parcels are mostly to blame.
On the flip side, the relaxed rules will also mean a higher supply of property projects and more price-competition among domestic developers, which will pressure profit margins. Thinner margins will reduce the cushion available to developers to cut prices and spur demand during economic downturns. That being said, larger Indian property developers have reported EBITDA margins between 25%-40% on average, and have more headroom for margin compression than, Chinese developers, most of whom have EBITDA margins below 30%. Aside from the level of competition, developers’ profit margins depend on the market segments they cater to, the point in the economic cycle, and the average age of their ongoing development projects. In a more competitive environment, factors such as a developer’s track record of executing high-quality projects as well as on-time deliveries will become more important differentiators for consumers, and will help to increase developers’ market share and prop-up their long-term profitability.
Source: Money Control