INDIA – The outlook for India's residential market has shifted from 'negative' to 'stable' despite continued weak demand and falling sales among the sector's dominant domestic players, according to India Ratings & Research, a subsidiary of US ratings agency Fitch.

Despite an uptick in bank mortgage volumes from May last year, the report pointed to the negative impact on consumer sentiment of macro weakness and anticipation of redundancies and salary freezes.

"Persistence of adverse sentiments, high inflation and high interest rates, which reduce affordability, coupled with high property prices, continue to hinder any improvement in demand," it said.

Although residential prices held in most cities last year, real estate companies' revenues fell overall by 8% in the 12 months to September from the same period the previous year. 

According to the report, this indicates a shift in demand towards affordable housing in first-tier cities and new developments in second-tier cities.

Moribund sentiment in the residential market is replicated in office, where the IT sector anticipates headcount additions of 30% below the two-year average. 

Demand for retail space will likewise be muted in the near term.

Meanwhile, sector liquidity has improved as a result of the sale of non-core assets and developers' increased use of joint ventures.

However, leverage will remain high in the short to medium term in the absence of buyer advances, which are likely to increase only if sentiment improves.

Banks increased their exposure to the sector by less than 2% over most of last year.

Private equity inflows fell by 70% from $1bn (€740m) in 2011 to $700m in 2012.

Meanwhile, weak capital markets have discouraged IPOs.

"The Indian real estate sector will continue to face limited funding options in the near term," the report said.

A 'stable' rating would require continuation of cash flow generation, stable margins and overall improvement in demand.