Mumbai: With a revival expected in the realty sector on the likelihood of reduction in interest rates, the return on equity and profitability of real estate developers is expected to improve in FY14, a recent report by Crisil said.
"Sustained growth in demand, which is expected to improve on interest rate cuts likely next year, will be a key determinant for the improvement in real estate developers' profitability and return on equity (RoEs) next year," ratings agency Crisil said in a statement.
Over the past two years, the industry players had suffered a major set back mainly due to subdued demand, high construction costs and higher interest rates that were responsible for the weak earnings ratio, ratings agency Crisil said in a statement.
According to the report, earnings of 23 listed companies declined 21 percent and 9 percent in FY12 and first half of FY13, respectively.
Further, the RoEs, too, declined from 7.7 percent in FY10 to 4.7 percent in the first half of this fiscal year.
"Subdued demand and high construction costs impacted revenues and margins. This coupled with high debt and rise in interest rates dented earnings and return ratios. We expect earnings to remain muted for the rest of FY'13 but should pick up in FY'14," the report said.
The report further said that with hopes of gradual recovery of GDP in FY14 and signs of inflation cooling down, it is expected that RBI could cut the repo rate by at least 50 basis points in the next one year.
"This is expected to improve affordability and provide the much-needed stimulus to demand. Consequently, earnings and return ratios are expected to improve in FY'14," it said.
Crisil expects 8 percent improvement in profit before tax and 100 basis points increase in RoEs at an aggregate level purely on 0.50 percent decline in interest rates.
On city-based analysis, Crisil expects absorption of new residential units across six key cities, including Mumbai, National Capital Region (NCR), Pune, Bengaluru, Chennai and Hyderabad, is expected to increase at a compounded annual growth of 7 percent to 251 million sq ft in the next two years.
Mumbai is expected to record the highest compounded annual growth of 14 percent over the next two years due to pent-up demand.