De­spite in­vestor favour rocky road for realty

HT Estates - - HTESTATES - Vatsala Ka­mat vatsala.k@livemint.com

In­vestor ex­pec­ta­tions from real es­tate stocks have­climbed­many lev­els, thoughit’s un­clearif these are built on a solid foun­da­tion. TheBSEReal­tyin­dex­has­ral­lied 60% in a year, a stel­lar per­for­mance­com­pared­totheSen­sexand BSE500in­dex, whichroseby14% and 17%, re­spec­tively. Per­haps, the im­prov­ing fi­nan­cials of toprun­grealestate firms have­made in­vestors op­ti­mistic about a re­cov­ery.

Cloud­sof­gloomon­some­fronts such as a pile-up of un­sold units and mount­ing debt are clear­ing up, but a re­cov­ery in home sales and­prices, key­to­bet­ter­prof­its, is still some quar­ters away.

Large listed com­pa­nies are see­ing green shoots of re­cov­ery. An­anal­y­sisof10realestate­firms that com­prise the BSE Realty index shows that the av­er­age in­ter­est cost as a per­cent­age of sales of these firms im­proved to 18% in the De­cem­ber quar­ter, from 25% in the pre­ced­ing quar­ter and 22% in the year- ago pe­riod—go­ing back to the level seen eight quar­ters ear­lier. Two crit­i­cal fac­tors have played out favourably for realty firms. One, the strin­gent en­force­ment of the Real Es­tate (Reg­u­la­tion and De­vel­op­ment) Act ( RERA), which­pul­ver­ized newlaunches, and forced com­pa­nies to push sales fromex­ist­ing projects. This pruned un­sold in­ven­tory lev­els. Data from Icra Ltd’s sam­ple of 11 listed realty firms, mainly cater­ing to the hous­ing seg­ment, showed a 2.8% de­cline in in­ven­to­rylevels(in­val­ueterms) for the first time in two years, between the six month­send­edMarch2017 and the six months ended Septem­ber 2017. Lower in­ven­to­ries and fewer project launches brought down work­ing cap­i­tal needs and in­ter­est costs too.

Two, re­pay­ment­by­debt-laden firmshastrimme­dover­alldebtof listed com­pa­nies in the index. The num­bers are likely to im­prove­fur­ther­bytheend­ofthe March quar­ter. Home sales rose both­in­val­ue­an­dareaterms­dur­ingth­eDe­cem­berquar­ter­forBSE Realty index firms.

Re­in­forc­ing this data, Icra’s quar­ter-to-sell ra­tio that in­di­cates the num­ber of quar­ters re­quired to sell ex­ist­ing in­ven­tory, fell to 12 in the De­cem­ber quar­ter from 15 in the March quar­ter. How­ever, in­vestors must note that the road to re­cov­ery has more ob­sta­cles. These gains in the profit and loss ac­coun­thaveac­crued­from­reg­u­la­tory changes, op­er­at­ing ef­fi­cien­cies and a bal­ance- sheet clean-up that has low­ered in­ter­est costs. Im­prov­ingth­e­p­ay­ment col­lec­tion cy­cle from cus­tomers (which has been de­clin­ing for many quar­ters) is the new chal­lenge as projects need to be RERA-reg­is­tered be­fore so­lic­it­ing home­buy­ers and tak­ing any ad­vance pay­ments.

While­newlaunch­eswillsig­nal con­fi­dence among de­vel­op­ers that­de­mand­forhome­sisim­prov­ing, so far, realty firms are try­ing to push ex­ist­ing in­ven­tory. De­mand is sub­dued and the Re­serve Bank of In­dia’s House Price Index shows de­clin­ing af­ford­abil­ity.

Anarock Prop­erty Con­sul­tants Pvt. Ltd says that the forth­com­ingGudiPad­wafes­ti­val­may be­sub­dued­forhome­sale­sas­buy­ers are cau­tious.

Be­sides, with­largede­vel­op­ers moving­in­totheaf­ford­able hous­ing seg­ment, where de­mand is higher, fu­ture re­al­iza­tions and profit mar­gins may be lower.

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