Despite investor favour rocky road for realty
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.