Still no pit stops for realty

T. Sowbhagya, a housewife in Bangalore, plays the stock market in her spare time. In April this year, she picked 50 scrips of DLF for Rs 626 each from the secondary market but sold those on May 2 for Rs 648, making a modest profit of Rs 1,122. But she was not so lucky with Puravankara, 40 shares of which she had bought in the IPO at Rs 400 in September last year. When she sold them at Rs 294 in March this year, Sowbhagya had lost Rs 4,300.

Click here to enlarge

Stories like hers are a legion in the market today. By mid-July, real estate stocks had lost 60-75 per cent in value from their January peak when the Sensex peaked to 21,206 and Nifty to 6,357. So, is it not time to do some cherry-picking? “It’s not. Stay away from the sector,” warns Ashok Jainani, Vice President and Head (Research), Khandwala Securities, a Mumbaibased brokerage firm. “We remain negative on the sector for at least the next couple of quarters. If the market rebounds, the sector might also bounce back. But that will be purely a technical one. One must use such occasions to exit,” says Jainani.

Nirmal Jain, CMD, India Infoline, also feels realty stocks have more pain left in them. “Investors apprehend a lot of problems like project delays and litigation hassles,” he says. A 15-20 per cent downside in realty stocks is waiting to happen as the NAVs initially projected by the realty developers were questionable, he points out, adding that an earnings slowdown is also inevitable.

Shailesh Kanani, a research analyst at the Mumbai-based Angel Broking, explains the sector’s woes thus: “Real estate is a capitalintensive business requiring regular flow of funds. While equity is not accessible, debt has become expensive due to high interest rates and is also scarce as banks are not keen to lend to the sector.”

Property prices need to correct 20-30 per cent and home loan rates need to go down by 100-200 basis points (bps) if volumes have to pick up again, says Kanani.

As a vital link between buyers and developers, property marketing companies seem to know where things went wrong. Amit Bagaria, Chairman & CEO of one such company, Asipac, explains: “A year ago when many real estate IPOs hit the market, there was euphoria. Valuations were based on land banks, which assumed that all land banks could be converted into saleable buildings that consumers would rush to buy at fancy prices, giving windfall profits to the real estate companies.” According to him, land banks did not turn into buildings overnight. “Bookings got cancelled or are getting cancelled faster than new bookings, thus resulting in negative cash flows in most developers’ books,” says Bagaria.

Funds will continue to be a problem for realtors as long as inflation rules high. Vijaya Bank Chairman Prakash P. Mallya says interest rates will come down only when inflation moderates. He confirms a sharp decline in home loan off-take owing to high interest rates.

But Mallya expects the situation to improve. “I have a feeling the inflation rate should come down to 9-9.5 per cent in September-December.” That means cheaper home loans again and a stable property market.

Still, most brokerages don’t proscribe the realty index for the long term. “As an investment strategy, we advocate that the investors consider an investment horizon of three-plus years. In the near term, however, there is likely to be lots of volatility, partly due to the uncertain global economic environment,” observes Shriram Iyer, Head (Research), Edelweiss Securities.

So, are there any worthwhile picks? According to India Infoline, DLF and Indiabulls Realty could be given a look-in due to their strong capitalised balance sheets that can fund their execution pipeline till 2009-2010, though HDFC Securities has sounded negative on DLF. On the other hand, Unitech and Puravankara are not quite the favourites—the former due to its very high leverage and the latter due to its high exposure in the residential segment, particularly Bangalore where absorption is expected to slow down.

Even as brokers are advising their clients to stay off real estate stocks, an HDFC Securities note mentions Akruti City as its top pick in view of its huge land bank in Mumbai, “which is less susceptible to a severe price correction because of the severe supply constraint in the region.” By the way, Akruti is holding above the issue price.