Realty check: Improving dynamics

Last Updated: Wed, Jan 02, 2013 05:03 hrs

Come January, and hopes of a rate cut have surfaced again. One sector that could really benefit from such a move is the debt-laden real estate sector. Once inflation and interest rates start coming down, the sector’s profitability will also improve. Analysts say that over the last couple of years credit flow to the sector has sharply declined but the chances of a reversal of this trend are also imminent. As the macro-economic indicators show signs of stability and inflation abates, home sales should also see a pick-up. Edelweiss Securities believes liquidity to developers could improve, with debt stabilising and expected to decline. The channel checks done by the brokerage also indicate banks are more inclined to lend and the cost of funds from non-banking financial companies are easing. Investors can either look at strong developers with low or zero debt or bet on potential balancesheet turnarounds, where leverage is high.

On the ground, things are looking better, claim developers. Recent project launches by marquee developers like Godrej, Tata Housing and L&T have seen strong response. This suggests that demand is set to return in a big way, once rates start easing. According to JP Morgan, festive demand, coupled with increasing interest from non-resident Indians (due to rupee depreciation), has supported the pre-sales trends. “In terms of markets, Bangalore continues to witness steady demand trends, although we expect activity to pick up significantly in Gurgaon and Mumbai going into CY13 vs a sedate CY12,” the brokerage adds. Among listed developers DLF, Indiabulls Real Estate and Godrej have the strongest launch pipeline over the next six months.

If one were to look at trends, the commercial leasing business is subdued, as companies are not expanding operations. Most developers are deferring their commercial developments as demand remains subdued. However, markets like Bangalore are an exception where demand is strong and rentals are seeing an uptick. With the government approving foreign direct investment in retailing, demand should return to this segment as well. Developers say demand for leasing continues to be strong in operationally strong malls.

This recovery was visible even at the end of the second quarter of this year. Analysts believe recovery will continue over the next few quarters as well, as realisations are also improving. Revenues of listed developers, except DLF, improved 12 per cent and operating margins were up 341 basis points sequentially in the second quarter, says Edelweiss. Analysts say there is an inverse correlation between margins and inflation. With inflation coming off in the second half of FY13, margins of developers should move up. This, along with asset sales and lower interest payout, would be positive for the sector. However, high debt continues to be an issue for most companies. Analysts expect the stress to ease gradually.

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