Sector Specific - Realty Industry
Realty Industry (updated - 25 June 2009)
Crisil says capital values for residential real estate could fall another 810 per cent in 2009 before stabilising next year. This is somewhat in contrast to what developers have been indicating about property prices. In a study on the real estate market, Crisil says that even investors, looking for capital appreciation, are likely to remain cautious until prices stabilise. Another key point that Crisil makes is that the so-called ‘affordable housing’ that developers are talking about are unlikely to get a strong response. That’s because many of these projects are coming up on the outskirts of cities, very distant from the business districts, and in locations where there are few amentities.
Affordable properties, it points out, are those that come up within city limits and are within the reach of 60 per cent of the population in that area, so that there is a meaningful demand. As for commercial property, Crisil expects lease rentals to fall even next year on the back of a 30-40 per cent fall from the peaks that they hit sometime in the first half of 2008. The news is not much better for the retail segment, where Crisil expects a 16-18 per cent fall in rentals this year and some fall next year too. IDFC SSKI points out that genuine buyers are returning to the market only in the residential segment.
Given this backdrop, the doubling of real estate stock prices in the past three months seems out of place. It is true that many property firms have been bailed out by banks with their loans having been restructured and a couple of them have managed to pick up equity money through placements.
Realty Industry (updated - 09 April 2009)
Property stocks have staged a strong comeback in the recent rally with the BSE Realty Index gaining 49 per cent compared with a 31 per cent move for the BSE Sensex. Apart from the fact that they had been been mauled, stocks have bounced back because several companies have managed to get their loans rolled over from banks which means repayments have now been postponed to 2010-11.
However, companies still need to meet recurring cash flow obligations (interest plus the difference between recurring operational costs and income) and according to Motilal Oswal, this could be a challenge. A recent report concludes that while many firms are relying on affordable housing projects will allow them to generate adequate cash flows, they cannot afford to do so. The report says companies would require contributions from other segments such as commercial or retail space as also from premium housing. The bad news is that the recovery in these segments seems a long time away because the supply of space today far exceeds the demand.
That’s one reason why Edelweiss Capital expects afurther correction in property prices of 35 per cent over the next three years. Demand from the IT sector, one of the biggest consumers of space, has almost dried up as has the requirement from retailers.
Against this backdrop, real estate firms could have a problem matching their cash flows unless they keep selling their assets.
However, at the end of the day, they need to be able to sell properties to generate cash flows. Of course, companies are attempting to stimulate demand by bringing down prices, but that means they need to sell larger volumes because the rate per sq ft is now down at least 30 per cent from peak levels. That doesn’t seem to be happening - even for bigger companies, the gap between the number of apartments sold and those actually delivered is large.
Also, while offering construction-linked payment plans as opposed to time-linked plans is fine, it only results in cash flows becoming back-ended.
source - BS
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