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India's residential real estate sector is entering the middle stage of its current cycle, with developers shifting focus from debt reduction to capital deployment, project execution and development of annuity assets, according to a report by Nuvama Research.
The report said cash EBITDA margins are expected to stabilise going ahead, while developers are likely to increase spending on land acquisition and annuity-generating assets. "While the fundamentals of the sector remain resilient, the housing cycle itself has entered the middle stage," Nuvama said. According to the report, the balance sheet repair phase that characterised the sector in recent years is largely over. Developers now have stronger balance sheets, lower leverage and significant liquidity, supported by equity fund raising. As a result, the focus is increasingly shifting towards deploying capital and generating returns from new investments. "The easy gains from deleveraging and working capital release are largely behind us. The focus has now shifted towards execution, capital allocation and return on incremental investment," the report said. Nuvama's analysis of cash flows of 21 real estate developers showed that operating cash generation has remained steady despite concerns over a moderation in sales volumes. Industry collections crossed Rs 1 trillion, while operating cash profits also expanded. However, cash EBITDA margins declined to 39 per cent in FY26 from 42 per cent in FY25. The report attributed the margin decline mainly to a lower proportion of inventory being sold at the launch stage. At the same time, free cash flow generation moderated as developers increased spending on land acquisition and construction of annuity assets. "The sector's operating surplus came down from 42 per cent to 39 per cent while free cash flow deficits widened marginally," the report said. The brokerage also noted that debt funding has once again emerged as an important source of growth capital, while equity funding has taken a back seat. Nuvama said the increase in leverage should not necessarily be viewed negatively, as developers are using borrowings differently compared with previous cycles. "In previous cycles, debt was largely used to build land banks. Current borrowings are being directed towards creating annuity assets with strong cash flow generation potential," the report said. It added that leverage remains well below levels seen in earlier cycles, while working capital management has improved significantly and interest burdens remain lower than historical levels. The report said these trends indicate that developers are more confident about the sustainability of the current housing cycle and are preparing for the next phase of growth. Looking ahead, Nuvama expects sales momentum and launch absorption to remain steady. Operating margins are likely to remain stable to slightly lower, while capital expenditure on land and annuity assets is expected to continue. The brokerage expects developers to have limited need for large-scale equity dilution as they increasingly use internal cash generation and debt to fund expansion. (ANI)
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