If we take a look at the current market scenario , reality companies have been the worst hit by the present economic slowdown. The S&P BSE Reality index in comparison to its highs in 2008, has lost almost ninety percent of its market capitalization. Even though the economy has considerably slumped from its pre-crisis level of growth, which has adversely affected the demand for commercial and housing space alike, realty prices have not crashed.
On the flip-side, realty prices have been increasing over the years. Due to the ever-increasing demand for housing units generated by a steadily urbanizing population, the prospects for realty companies ought to be brighter than what the stock prices have been implying.
However, things cannot invariably be perceived in black and white, particularly when it involves the Indian real estate. There are numerous problems that the realty sector has been grappling with; adverse economic setting, governance issues and high debt are few of the major ones. Combined together, these factors have negatively affected the confidence of investor in this sector.
The present environment
In the run-up to the 2008 economic meltdown, property prices in addition to the stock prices of realty companies went far ahead of what was warranted by the fundamental. There was an euphoria within the market and prices were reaching exorbitant levels, however within the past few years realty companies have suffered because of the difficult market conditions combined with higher level of debts.
For real estate companies the factor of high interest rates is a negative factor since it not only affects companies with higher interest payment on debt, but also adversely affect their affordability and ultimately demand. This is caused as the companies have to pay higher rates on their borrowings which affects their profitability, and in turn increases the sum of equated monthly instalments (EMIs) that the end user has to pay, thus negatively affecting demand.
With falling revenues and profits together with higher level of debt, it’s natural that property costs have corrected within the market.
Issues pertaining to Governance
Apart from a difficult economic environment, issues with governance and credibility too are the reasons for the drub witnessed by the sector. Governance is a prominent issue, due to which numerous investors do not desire to own stocks within this space. Even though high standards of corporate governance were never a strong suit of companies functioning within the realty sector, however recent incidents have further eroded investor confidence.
Significant changes within investor perception
As per eminent real estate research analysts, the harsh macro-economic environment too has changed the way people perceive real estate companies, as earlier people used to value land banks with the company, but not any-more. Further, the realty market has also become conscious about governance issues and higher debt. Things are unlikely to improve for realty companies as there’s no recovery in view for the broader economy. Even if the economy does turns around, it’ll be extraordinarily tough for the realty sector to recover lost ground.
Research analysts take
The downfall of stock that has been witnessed by the real estate sector within the past few years is a direct consequence of both tough macroeconomic conditions and the method in which real estate business is conducted within this country. This is does not recommend that every company within the business has governance issues, but the entire realty sector is not currently enjoying the confidence of investors.
Furthermore, larger companies have bigger debt amounts in their books, which would keep adversely affecting their business strategies, profits and thereby their chances of revival. Therefore, investors planning to invest within the stocks of realty companies would be better off avoiding the sector. It would be better to invest in real estate than to invest within real estate companies.
The business of real estate is very interest rate sensitive and a rate cut might provide a boost to stock prices. However, in the present scenario it alone is not enough to revive the sector.
Stocks of real estate companies
In fact, over the past couple of years the profit and revenue of numerous real estate companies and have considerably slipped.
For illustration, the revenue for the biggest constituent of the realty index – DLF Ltd slipped from Rs. 2,827.90 crore within the fiscal of 2008-09 to Rs 2,150.04 crore within 2012-13; during the same period its net profit also slipped from Rs 1,547.77 crore to Rs 501.56 crore. Howbeit, the total amount of the company’s debt is almost equivalent to its total market capitalization. Familiarly, Unitech Ltd’s revenue fell from Rs 1,852.25 crore to Rs 1,053.09 during the same period, while the net profit of the company slipped from Rs 739.66 crore to Rs 151.98 crore.
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