Not out of the woods

There has been some uptick in volume, but RBI’s recent money tightening may play spoilsport by putting pressure on prices. Meanwhile, the land acquisition bill has come as a fresh blow to the ailing industry 

The real estate sector has been plagued by high interest rates, slow demand, acute labour shortage, project delays and new regulations. And the new land acquisition bill, which has already been approved by the Lok Sabha, can be another big blow for the industry.

The pain in the real estate sector can be clearly felt in the BSE realty index, which now quotes at lowest level since it was launched in August 2007.

The index is down 85 per cent from its early-2008 peak and even though real estate stocks have shed 25-70 per cent of their market value this calendar, they are still searching for the bottom.

Eight of 13 stocks the BSE realty index stocks hit their 52-week lows in August, while three of them — HDIL, DLF and Oberoi Realty — in fact hit their all-time lows during the month.

While industry watchers point to some improvement in volume in the commercial segment, market analysts have advised investors to wait until more meaningful reduction in their debt levels. The new land acquisition bill can also raise cost of land significantly and will impact project costs and margins, they said

Revival hopes

India had a ready stock of nearly 460 million square feet (msf) of office space with 18 per cent vacancy as of June 30. Leasing activity in the seven major cities saw a recovery with the absorption of 7.2 msf in the June quarter against 3.4 msf in the March quarter.

DLF managed to sell 1.8 msf amounting to Rs 2,400 crore in the June quarter compared with sales worth Rs 1,240 crore in the March quarter and Rs 3,800 crore in the whole of FY13. The developer, which had a net debt of Rs 20,369 crore at the end of June quarter, aims to lower it to Rs 17,500 crore by the end of FY14.

Unitech, another north Indian player, delivered 1.05 msf of completed area during the quarter. The realtor saw bookings worth Rs 450 crore (highest in two years) in the first quarter, which included 0.62 msf of residential space valued at Rs 362 crore and non-residential sales worth Rs 88 crore. The company had consolidated debt of around Rs 5,600 crore at the end of FY13.

Mumbai-registered HDIL managed to cut its debt by around Rs 340 crore in the first quarter to Rs 3,830 crore. The company said its residential portfolio during the quarter improved. Demand was especially from the Mumbai outskirts while there was sluggishness in the high-end segment.

The Karnataka-based Sobha Developers clocked sales of 0.92 msf in the June quarter, up 10 per cent on a year-on-year basis. The firm has set a target of Rs 2,600 crore sales for FY14 and reported Rs 600 crore sales in Q1.

Dampening factors

Industry watchers say real estate players  are unlikely to raise debt levels to fund new projects at the present juncture due to high interest rates.

“It is difficult to see any major recovery in the commercial property segment
during the next quarter, as business sentiments have been affected adversely due to the fall of the rupee. With interest rates going up, debt levels of real estate companies are unlikely to see any significant rise,” said Lalit Kant, executive vice-president for real estate at  Arthveda Fund Management, the private equity arm of Dewan Housing Finance.

Some analysts do not expect any substantial reduction in debt. Dhananjaya Sinha of Emkay Global Securities said debt levels can be reduced only by reducing inventories or by accessing capital market.

“In the case of the capital market, we believe the situation has worsened in recent times. Our visit to Gurgaon and Delhi regions suggests that there has been some correction in realty prices. If this is the case with other regions, we don’t see any meaningful reduction in debt levels. Anyways, the recent money tightening by RBI will result in higher home loan rates, denting overall sentiments,” he said.

Sinha says Godrej Properties, Oberoi Realty and south-based players such as Sobha Developers are better placed among the real estate players.

While he cited zero debt for his preference for Oberoi Realty, he says property prices in south India are still affordable and could see an uptick in demand.

Kant, on the other hand, prefers Jaypee Infratech and Godrej Properties. A report by brokerage IIFL said it would take 11 years each for the companies in the utilities and financial (mainly real estate) sectors to repay their existing debt.

Land acquisition bill

Mayank Saksena, managing director for  land services at Jones Lang LaSalle India, said: “For developers, the cost of land is going to increase significantly, impacting project costs and, therefore, margins. Land valuations are already high and an further increase would make land acquisition more difficult. Anyone without an existing land bank will now be looking at vastly increased entry costs.”

Navin Raheja, president of the National Real Estate  Development Council (Naredco) said not only will the cost of land go up, the time taken for acquiring land will get prolonged as the rehabilitation and resettlement policy will be applicable in the case of land acquisition of 50 acres in urban areas and 100 acres in rural areas.

“In most parts of the country, private developers acquire land at mutuallynegotiated market price with 100 per cent consent of landowners. Additional financial burden of the R&R component will increase the cost of land,” he explained.

Other concerns

While there are persisting concerns over high debt levels, these concerns could get elevated as the deleveraging cycle of banks is under way as  investment-todeposit ratios have hit a multi-decade high of 108 per cent.

“The reversal of easy business cycle, scarcity of capital and tight monetary cycle in domestic and international markets will force banks to deleverage their balance sheets over the next three to four years. This augurs a difficult time for the real estate industry, which has witnessed huge inflows during the last decade and set the stage for a correction,” said Manish Bhabdari of Vallum Capital.

Bhandari said with impending central and state elections in 10 states, costing around $15 billion, real estate due to its “ancillary role as a vault of illicit wealth” could witness outflow of money to fund elections over the next 18 months.