Shaky foundations

When it rains, it floods—and one is not just talking of India’s financial capital Mumbai, which has reserved one day of the calendar for a deluge. But that’s the least of the worries for the financial hub; it’s more concerned with the never-ending slide of the realty index on the Bombay Stock Exchange, which is down by over 65 per cent from its peak of 13,848 in January (the broader 30-share Sensex is down some 35 per cent from its peak). “But even at that value stock brokers were shouting themselves hoarse, saying that the index was at least 50 per cent overvalued,” counters Hitesh Agrawal, Head of Research, Angel Broking. So, what explains the crash in realty equity? Dharmesh A. Mehta, Head-Equities, Enam Securities, attributes it to concerns over execution of realty projects.

“What these real estate developers were trying to do is to achieve the same kind of growth they had in the past 20 years within a time-frame of three years. The time-lines just didn’t seem realistic enough,” he points out. Ambar Maheshwari, Director Investment Advisory Services, DTZ, a global real estate advisor, has a slightly different take; concerns over execution capability are not developer-specific but project-specific. “Execution concerns exist for projects that either do not have any pre-sales ability, which will be mostly for commercial lease-based projects; or are in regions where there’s an impending oversupply situation or in cases where developers do not have adequate funds—leveraged or equity— to cover construction and other costs,” he explains.

Developers, for their part, recognise there’s a problem, although they don’t see a case for panic. “I would call these interesting times where the markets are maturing and heading towards rationality. Developers, too, will need to focus on deliveries rather than on mere announcements,” observes Manish Periwal, CMD, Pioneer Urban Land and Infrastructure, a premium property developer. Periwal admits that there could be developers in trouble, although he thinks he’s done well to steer clear of it. “There could be a cash crunch in certain cases—especially with those developers who have expanded too fast,” feels Periwal, who appears to have played his cards smartly.

At a time when Tier II and Tier III towns were on everybody’s radar, he kept away. “Three years ago, we did undertake a feasibility study of entering Jaipur, but realised that there was no job-creation scenario that could kick-start a housing boom. Besides, the existing players there had enough supply to service the city’s needs,” he recalls. Not everyone believes it’s a virtue to stay away from small-town India. Consider the approach of Ansal Housing. “In markets such as the NCR, price levels have gone too high, so the common buyer will perforce look at Tier II cities like Karnal, where a 200 sq. yard plot would come for as low as Rs 15 lakh,” informs Kushagr Ansal, Managing Director, Ansal Housing. He evidently isn’t regretting this strategy. “We have enough internal accruals and, if need be, will also invite private equity.

There might be a couple of months’ delay in certain projects but, rest assured, it’s got nothing to do with any cash crunch,” he emphasises. But if the realty companies are feeling the cash pinch, it only provides a better opportunity to the private equity (PE) pashas. Most PE players feel the environment is better now for capital deployment as valuation expectations from land owners and developers have significantly moderated; the only downside is that since project execution is being delayed, so will their exits. “Investing in specific projects enables more control for the PE player with the possibility of active involvement and larger equity stakes; whereas enterprise investing is typically more passive, that too with smaller equity stakes,” informs Raj Inamdar, Chief Investment Officer, South Asia Real Estate Fund.

This fund has just struck two joint ventures with Fortis Chairman Harpal Singh-promoted Impact Projects for upcoming townships in Amritsar. However, given the current valuations of most realty scrips, which are trading even below their listing price, not many developers would like to offer equity to a PE player at the current juncture. In fact, market men like Enam’s Mehta and Angel’s Agrawal reckon that even at the current levels realty scrips are still overpriced. “The real estate crack has just begun, it will only get deeper and stabilisation is still some years away,” avers Agrawal. The only positive, says Maheshwari, is that at every new low, buyers will come in to sustain the market, which may be down, but certainly not out.

—Tejeesh N. S. Behl