CHENNAI: Residential real estate developers in India are expected to experience steady growth in sales in value terms during the current financial year and the next, according to rating agency Crisil Ratings.
This follows three years of strong recovery after the pandemic. Demand is now beginning to stabilize, the agency says in its latest report on the credit worthiness residential development companies.
Sales volumes across India’s top seven cities—Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Pune, Hyderabad, Chennai, Kolkata, and Bengaluru—are projected to grow by 5 to 7 percent, while average property prices are expected to increase by 4 to 6 percent.
Although more new homes are being launched than sold, leading to a slight rise in unsold inventory, developers are in a strong financial position. This means that the increase in inventory is unlikely to cause significant problems, stated the Crisil report.
Between fiscal years 2022 and 2025, residential sales grew at an average annual rate of about 26 percent. Around 14 percent of this growth came from higher demand, while the rest came from price increases.
Last year, demand remained flat due to high property prices and delays in new project launches in some cities. These delays were caused by state elections and changes in property registration rules. However, demand is expected to pick up again this year and next, helped by lower interest rates, more stable price growth, and strong interest in premium and luxury housing. The removal of earlier obstacles to new launches is also expected to support this rebound.
Premium homes in demand
Premium and luxury homes are becoming increasingly popular. In 2020, these segments made up only 9 percent of new projects, but by 2024, that number rose to 37 percent. This shift is driven by rising incomes and growing demand for larger, more comfortable living spaces. These segments are expected to make up 38 to 40 percent of new launches in 2025 and 2026. As the growth in these segments evens out, average home prices are expected to rise steadily at 4 to 6 percent, instead of the sharp increases seen over the past two years.
“The premium and luxury segments in the top seven cities have witnessed a significant surge, with their share of launches increasing from 9% in calendar year 2020 to 37% in 2024," says Gautam Shahi, Director, Crisil Ratings.
He added that this can be attributed to rising incomes and urbanisation, which have fuelled the desire for larger, more luxurious living spaces. As the trend of premiumisation continues, the premium and luxury segments are expected to account for 38-40% of total launches in calendar years 2025 and 2026.
"With the growth in these segments normalizing, the average price is anticipated to grow at a steady rate of 4-6% over the medium term, following the double-digit growth seen in the previous two fiscals.” Shahi says.
Drop affordable segment launches
In contrast, affordable and mid-range housing will likely make up a smaller share of new launches. Affordable housing is expected to account for only 10 to 12 percent, and mid-range for 19 to 20 percent of new projects in 2025 and 2026. This is a significant drop from their 2020 shares of 30 percent and 40 percent, respectively. Higher land and construction costs have made these segments less profitable for developers.
To meet the expected rise in demand, developers have increased the number of new project launches in the past three years. As a result, supply has exceeded demand, and this trend is likely to continue over the next two years. This will lead to a slight increase in inventory levels, rising from about 2.7 to 2.9 years in the past to around 2.9 to 3.1 years going forward.
Despite this, developers are collecting payments on time and completing projects efficiently. Many are also shifting to asset-light models, such as joint ventures and shared land development, which require less upfront investment. These factors have helped developers reduce their debt significantly.
Another factor supporting their financial strength is the increase in equity funding. Many developers have raised money through qualified institutional placements (QIPs), with QIP funds covering 24 percent of their total debt last year, up from 13 to 16 percent in the previous three years.
The improvement in cash flow from operations—the money left after paying for construction, operating expenses, and land costs—has also strengthened developers' financial health. Their debt-to-cash flow ratio is expected to improve to 1.1 to 1.3 times this year and next, compared to 1.2 to 1.5 times over the last two years. This is a significant improvement from fiscal 2020, when the ratio was as high as 5.6 times.
Going forward, it will be important for developers to keep debt at low to moderate levels and to manage inventory carefully. As long as they stay financially disciplined, their position in the market should remain stable, said the Crisil report.