Real estate sector may recover in 2013

Stable residential demand, better liquidity and a slew of new project launches across markets augurs well for the real estate sector in 2013. The sector, which has disappointed investors over the past two years, is already showing signs of stability.

On the demand side, the situation began improving from May 2012, as evident from the growth of home loan disbursals by banks. According to RBI data, gross bank credit to the housing sector has been rising since May 2012. In November last year, the last month for which data is available, banks disbursed Rs 2,667 billion to the housing sector, a 7.5 per cent increase over November 2011.

In a January 16 report, ratings agency India Ratings has noted that the operating profit margins or EBITDA (earnings before interest, tax, depreciation and amortisation) of 13 real estate companies, including DLF, Unitech, Sobha Developers and HDIL, stabilised last year.

"EBITDA margins, which steadily declined to 30 per cent in financial year 2011/12 from about 55 per cent in financial year 2007/08, remained at around that level during 2012. This was possible despite increases in construction costs, signalling a potential return of stability," says the report.

In the last few quarters, many real estate companies have reduced their debt by monetising non-core assets. In September 2012, the aggregate outstanding debt of the 13 real estate companies was seven per cent lower than in September 2011.

In a report, Sandipan Pal, analyst at Motilal Oswal Securities, notes that the "higher focus on execution by moving to an outsourcing model (by DLF, Indiabulls Real Estate) would bring more certainty to construction and cash flow timelines."

However, sluggishness in the commercial real estate segment continues to worry analysts. While the general economic slowdown is keeping demand for retail space low, demand for commercial space is subdued due to lower hiring in the IT/ITeS sector. The average quarterly net hiring in major IT and ITeS firms such as Infosys, Wipro, TCS, Cognizant Solutions and HCL Technologies, among others, which drives demand for commercial space, was at around 21,000 in 2012, 32 per cent lower than in 2011 and 28 per cent lower than in 2010.