Fitch Ratings Predicts 20-30% Decline in Indian Real Estate Sector due to Currency Demonetization

Fitch Ratings Predicts 20-30% Decline in Indian Real Estate Sector due to Currency Demonetization

Fitch Ratings has predicted 20-30 percent decline in residential real estate sector after currency demonetization announced by Indian government. The Fitch Ratings report has given positive outlook on Chinese residential real estate as the sector has witnessed downward pressure over last few quarters. Compared to other countries, real estate in Asia Pacific region is still going strong. However, Indian real estate developers could suffer decline in sales during year 2017.

However, it will also depend on policy decisions taken by Indian government and the Central Bank of India on interest rates. If the banks reduce their interest rates, affordable residential real estate sector could even witness growth. It all depends on what actions the Indian government will take after its currency demonetization plan failed to generate the desired results. Demonetization has led to major disruption for many sectors and this could hamper investments in business and real estate in short term. If the government goes on course correction, it could announce sops for real estate sector in upcoming budget.

Fitch Ratings report titled ‘2017 Outlook: Asia-Pacific Corporates’ has changed outlook for residential real estate in India to negative from earlier stable outlook. Indian government is pushing forward for affordable housing in major cities across the country. Modi government announced smart city plan after coming to power. However, little action has been taken on ground regarding development of smart cities. With less than 2.5 years remaining for the current government, it will be interesting to see how the smart city projects move forward.

Indian authorities were pressing rating agencies for rerating of the country but failed in their endeavors. Fitch Ratings kept its ratings at the same BBB Negative for India with ‘stable’ outlook. The government agencies also failed to press S&P Ratings on ratings upgrade.

In its ratings note, S&P said, “The stable outlook balances India's sound external position and inclusive policy making tradition against the vulnerabilities stemming from its low per capita income and weak public finances. The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts.”

Surely, Indian government will face pressure on ratings front. IMF and World Bank have also lowered their GDP growth estimates for India after currency demonetization. The impact on economy will be clear within 3-4 months.

Indian banking sector is suffering due to loan issues as many corporate houses have failed on repayments. With high interest rates, the demand for credit has remained low over the last few quarters.

Indian real estate sector has grown impressively over last few years but the growth could face some hurdles in coming quarters. The long term outlook for the sector is positive as the population growth is driving demand in major cities across India.

Inputs for this story have been provided by our Indian correspondent Karan Sharma.

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