"Sales traction remains slow, particularly in markets with large unsold stock such as Delhi-NCR, Mumbai-MMR and Pune, resulting in continued over-supply," ICRA said.
With most of the unsold inventory comprising either units with high ticket sizes or units located in peripheral areas with weak network infrastructure, the challenges associated with liquidation of the stock are expected to continue.
"On the positive side, the sales in the sub-Rs 50 lakh segment have witnessed considerable momentum and given the government incentives for development and offtake of affordable housing units, positive trends in both demand and supply for this segment are expected to continue going forward," ICRA further said.
With home-buyers increasingly leaning towards reputed developers with an established track record of on-time and quality project completion, larger players have been registering healthy sales and project launch levels despite the overall sluggishness in the industry.
Thus, the market share of such developers has been increasing and this trend in market consolidation is expected to continue.
"Structural changes, including the implementation of RERA, GST and IBC, as well as the earlier demonetisation drive, have further underpinned this consolidation and have supported confidence levels among home-buyers. Nonetheless, a broad-based recovery in demand across the sector appears to be some time away," ICRA said.
The rating agency said that the liquidity crunch in non-banking financial company (NBFC) and housing finance company (HFC) segment is a challenge for new housing supply.
ICRA, however, said the government measures such as the establishment of a Rs 25,000 crore funds for stalled housing projects, may alleviate some of the execution or delivery-related issues going forward.
"Concerns on overall stock levels, however, remain. A moderate level of new launches combined with the existing inventory overhang and low sales traction is expected to lead to overall inventory levels registering modest growth over the near-to-medium term, with the much-needed liquidation of the same being contingent on a wide-scale recovery in demand," the agency said.
Consequently, ICRA expects residential real estate developers to maintain a cautious stance towards new project launches and land acquisition deals.
With continuing weakness in home-buyer sentiment demand is expected to remain muted, particularly for projects which are under-development and for units with high ticket sizes, it added.
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