US Credit Rating Downgrade – Indian Real Estate Holds Its Breath

Over 60% of Indian software exports are to the US, and nearly 20% are to Europe. Since both these geographies are affected, there will eventually be an impact on Indian IT companies. The dollar’s depreciating against the rupee will make Indian software exports to the US less favourable. This will impact the growth of the IT sector, which contributes 50% of the office space demand in India. We are looking at a potential reduction in the expected levels of demand for IT-centric office spaces by next year. In the current year, we will not see a significant reduction in demand since it will continue to be driven by existing contracts.
On the brighter side, the lowering of crude oil prices could have a softening effect on inflation, which will in turn help home buyers. Also factoring in possible discounts during the upcoming festive seasons, there may be a discernible uptick in residential sales as against the previous estimates.That said it is eminently clear that the Indian commercial real estate sector needs to diversify its focus, which is predominantly IT-centric at the present time. The market must start catering to other segments of office space. Overleveraged developers are doubtlessly in for a rougher ride now. Many of them may be prevailed upon to bail themselves by focusing on liquidating their existing projects and reducing their debt positions. Since liquidity is expensive on all fronts, this seems to be the only viable option for them. Many of the larger developers are already in the process of liquidating their land holdings and projects across cities. There may be many attempts at restructuring of debt, though it remains to be seen how successful these will be. We will also see an increase in mergers and acquisitions between overleveraged and more stable developers. Projects which are at reasonable levels of execution will still be able to reach completion stages and give possession to tenants, because their capital requirements are lower. However, projects in the initial stages have larger capital requirements and may face delays.

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