Poor Retail Sales and Work from Home Culture Pose New Risks for Commercial Real Estate in 2HFY21: Ind-Ra
Providers of retail space will see 30%-40% decline in rent collection in FY21 and firms with a large under-construction portfolio in both office and retail space will struggle to lease or sell them amid the prevailing adverse economic environment, says a research note. 
 
In a report, India Ratings and Research (Ind-Ra) says, it expects the owners of mature, leased out, grade A office space to not face any serious issues in rent collection or retaining the existing lessees, given long remaining lease periods with generally financially strong lessees and because the lessees will have to face high one-time, fit-out costs, if they move premises.
 
Most grade A office space providers have reported above 95% collection efficiency and few lease cancellations over the six months ended August 2020, it added.
Ind-Ra has revised the outlook for the commercial real estate sector from stable to negative for second half (2H) of FY21.
 
Ind-Ra has put a number of retail space providers on rating watch negative or negative outlook, given the concerns above. However, most of the office space providers remain on a stable outlook. The office space providers in Ind-Ra’s rated universe have generally leased out most of their floor space or have a strong parent. This has significantly reduced the adverse impact of the economic slowdown on the ratings.
 
According to the ratings agency, mature, grade A office space providers are unlikely to face difficulties in near term. "Office space providers, with mature, leased out, Grade A premises are unlikely to face significant difficulties due to the COVID-19 pandemic in the near term. This is because providers of large, grade A office space have strong counterparties, which are unlikely to default on their rent. Market-wide rents for office space could decline due to a weaker demand. However, the decline in rents is unlikely to reduce the rents for existing tenants as tenants need to incur significant upfront costs for fit outs when they move into new premises," it added.
 
Ind-Ra sees consolidation among office space providers to protect rents. It says, "There has been significant consolidation among office space providers over the past decade and only a few players (Embassy group, Blackstone group, K Raheja group, Panchshil Realty) control a large percentage of office space in India. This is likely to curb downward pressure on rents in the near term."
 
According to the ratings agency, the work from home culture is creating structural headwinds for office space. "We are concerned that higher acceptability of the work from home culture may structurally damage demand for office space in the long run, although it is too early to conclude one way or the other," it says.
 
Ind-Ra says it expects demand for under construction office and retail space to be anaemic during FY21 due to a weak economic environment. According to Liases Foras, absorption of grade A and grade B office space declined by 11% year-on-year (yoy) and 82% yoy respectively in 1QFY21. 
 
"We believe that the demand for office space in 1QFY21 in the Grade A segment was supported by agreements signed prior to the pandemic and 2QF21 could be worse. However, we expect 9.9% yoy growth in GDP in FY22, which should be accompanied by strong demand for retail and office space," the ratings agency added.
 
Ind-Ra sees retail rent collection to suffer due to weak retail sales. It says, "Anecdotal evidence suggests consumption in large malls is running at around 50% lower yoy, which is significantly hurting the ability of retailers to pay the full rent. Rent collection in FY21 could decline to 60%-70% yoy. In addition, a prolonged period of lockdown will further increase the acceptability of e-commerce and structurally reduce the demand for brick and mortar retail. However, the structural impact is likely to be smaller than in the case of office space being disrupted by the work-from-home culture."
 
The ratings agency expects retail space providers in its rated universe to maintain a healthy EBITDA/ interest coverage ratio of 2.9 times and 4.4 times in FY21 and FY22, respectively compared with 3.5 times in FY20, despite the adverse impact of the pandemic. Similarly, the agency expects the office space providers to report EBITDA/interest coverage ratio to 3.1 times and 3.8 times in FY21 and FY22 respectively, as against 2.9 times in FY20.
 
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    Silver Lake co-investors to invest Rs1,875 crore more into Reliance Retail
    Reliance Industries Ltd (RIL) and Reliance Retail Ventures Ltd (RRVL) announced on Wednesday that co-investors of Silver Lake will invest an additional Rs1,875 crore into RRVL, a subsidiary of RIL.
     
    This brings the aggregate investment by Silver Lake and its co-investors in RRVL to Rs9,375 crore, which will translate into a 2.13% equity stake in RRVL on a fully diluted basis. This latest investment values Reliance Retail at a pre-money equity value of Rs4.28 lakh crore.
     
    Commenting on the aggregate investment brought by Silver Lake, Mukesh Ambani, Chairman and Managing Director of Reliance Industries, said: "Silver Lake and its co-investors are valued partners on our journey to transform Indian Retail for the benefit of all Indians. We are pleased to have their confidence and support, as well as the benefit of their leadership in global technology investing and their valued network of relationships for the Retail revolution in India.
     
    "Silver Lake's additional investment is a strong endorsement of the tremendous potential of Indian Retail and the capabilities of Reliance Retail."
     
    Egon Durban, Co-CEO and Managing Partner of Silver Lake, said: "We are delighted to increase our exposure and bring more of our co-investors into this unmatched opportunity. The continued investment momentum over the last few weeks is proof of the compelling vision and business model of Reliance Retail - and underscores the tremendous potential of the transformative New Commerce initiative."
     
    Reliance Retail operates India's largest, fastest growing and most profitable retail business serving close to 640 million footfalls across its around 12,000 stores nationwide.
     
    Reliance Retail's vision is to galvanize the Indian retail sector through an inclusive strategy serving millions of customers by empowering millions of farmers and micro, small and medium enterprises (MSMEs) and working closely with global and domestic companies as a preferred partner, to deliver immense benefits to Indian society, while protecting and generating employment for millions of Indians.
     
    Reliance Retail, through its New Commerce strategy, has started a transformational digitalisation of small and unorganised merchants and is committed to expanding the network to over 20 million of these merchants.
     
    This will enable the merchants to use technology tools and an efficient supply chain infrastructure to deliver a superior value proposition to their own customers.
     
    With more than $60 billion in combined assets under management and committed capital and a focus on the world's great tech and tech-enabled opportunities, Silver Lake is the global leader in large-scale technology investing. Its mission is to build and grow great companies by partnering with world-class management teams. Its other investments have included Airbnb, Alibaba, Alphabet's Verily and Waymo units, Dell Technologies, Twitter and numerous other global technology leaders.
     
    The transaction is subject to regulatory and other customary approvals.
     
    Morgan Stanley acted as financial advisor to Reliance Retail and Cyril Amarchand Mangaldas and Davis Polk & Wardwell acted as legal counsel. Latham & Watkins and Shardul Amarchand Mangaldas & Co acted as legal counsel for Silver Lake.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Market Consolidation To Gather Pace in Residential Real Estate in 2nd Half of FY21 on Liquidity Concerns: Report
    While maintaining its negative outlook for the residential real estate (RE) sector for the second half of FY20-21 (H2FY20-21), India Ratings and Research (Ind-Ra) expects ongoing market consolidation for grade I players to be more aggressive than previously, due to their better brand, execution ability and access to liquidity in the current market environment than that for non-grade I players. 
     
    The ratings agency also revised its recovery estimates on the possibility of a slower-than-expected recovery, and believes that the overall residential demand would decline about 40% year-on-year (y-o-y) in FY20-21 with affordable segment to be the worst hit, due to a higher-than-anticipated slowdown, led by the COVID-19 pandemic.
     
    Ind-Ra, though has maintained a stable rating outlook for its rated residential RE companies for H2FY20-21, expecting limited rating movements in its investment grade large RE portfolio, as the ratings already reflect the agency’s revised expectations. 
     
    During Q1FY20-21, the pre-sales of grade I players fell 22% y-o-y as against the overall residential RE market (top-6 cities) which was down by 61% on y-o-y, as per the data from Liases Foras. 
     
    Indian RE sector accounts for over 10% of gross domestic product (GDP) and also is an employment generating sector. A continued slowdown in GDP could impact the purchasing power of buyers and consumer sentiment about job security, resulting in muted sales velocity for developers and thus lower cash flows available for debt servicing.
     
    Ind-Ra says it has revised its pre-COVID base case estimates for interest coverage and leverage for FY20-21 to factor in the impact of the outbreak. Ind-Ra expects interest coverage for grade I player to moderate to 1.5 times-2 times for FY20-21-FY21-22 compared with 2.33 times in FY20 and that for non-grade I players to moderate to 1 times-1.3 times as against 1.35 times a year ago. 
     
    "Net leverage (net debt/(inventory plus investment property plus receivables plus unbilled revenue less customer advances)) for both grade-I and non-grade-I during FY19-20 were better than estimates; however, we expect deterioration of these for grade I to 62%-70% for FY20-21-FY21-22 (FY19-20: 60%) and for non-grade I to 80%-85% (74%)," the ratings agency added. 
     
    Ind-Ra sees cost optimisation and market consolidation to continue over next few months. It says, "Many companies have initiated various cost optimisation measures to reduce their costs and focus more on digital offerings. Reputed developers with a track record of timely project delivery are likely to benefit and gain market share." 
     
    Existing under-construction and ready projects have piled up due to low base of sales in the lockdown period, leading to an all-time high of 36 quarters to sales, as per data from Liases Foras as of June 2020.
     
    Ind-Ra says it expects the quarters to sales to rationalise by end-FY20-21. "The demand-side risks combined with rising uncertainty over credit availability for the sector in the light of increasing risk aversion by financial institutions could add to the refinancing as well as liquidity risks for the sector. Timely execution skills coupled with sound cash flow management and financial flexibility could drive near-term rating actions," it added. 
     
    The ratings agency expects the sector’s liquidity to face a moderate risk in the near term. The sector’s refinancing requirements are likely to be the key monitorable. 
     
    Ind-Ra rated issuers with strong parentage will continue to have better access to capital markets. "Measures such as debt moratorium have provided an interim relief to the sector. Majority of the companies rated ‘IND A+’ and above have the liquidity buffers necessary to absorb the effect of decline in sales and pressures on margins, if any – even up to the next 12 months," it added.
     
    Around 27% of the Ind-Ra rated large RE players (revenue above Rs7.5 billion) availed debt moratoriums during March-August 2020 to preserve their liquidity profiles whereas the others had robust liquidity profiles or financial flexibility. Ind-Ra says it does not expect its high rated (IND A and above) large RE player to opt for loan restructuring. 
     
    As per the ratings agency, grade I players continued to report healthy and stable margins of 27% in FY20, supported by a pick-up in sales. A rise in interest cost expense outpaced EBITDA growth due to an increase in debt and resulted in a moderation of interest coverage for Grade I companies to 2.33 times in FY19-20 compared with 2.78 times in FY18-19, it added. 
     
    Ind-Ra says, non-grade I players have reported deterioration in margins to 17% in FY19-20 as against 21% in FY18-19, due to disruption in operations due to the COVID-19 related lockdown and intense completion from grade 1 players. 
     
    "The EBITDA fall has resulted in a moderation of interest coverage for non-Grade I companies to 1.35 times in FY19-20 compared with 1.78 times in FY18-19, reflecting the impact of continuing weak sales along with higher input costs and liquidity-driven execution issues. Non-grade I players are likely to face significant challenges in the near to medium term to meet interest expenses due to the weak demand and liquidity issues," Ind-Ra concludes.
     
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