The Housing and Urban Development Minister M Venkaiah Naidu’s comment earlier this week that the government will reduce the interest rates on home loans may be taken as an indication of the times to come for the real estate industry, since interest rate may be the single most important factor that can bring demand back.
Among other things that the Modi effect was expected to do was to revive the sentiments in the overall real estate market and experts felt that while the real effect on the ground may only be visible over the next year or two with sales rising, projects getting completed and cheaper source of funding becoming available to them, the share markets have already discounted the expected revival in real estate.
Even as the benchmark Sensex at the Bombay Stock Exchange has risen by 7.6 per cent in the month of May, the BSE realty index rose the highest and has jumped by 33 per cent in the month of May alone leaving behind the power, capital goods and the banking indices that were major beneficiaries in the recent rally.
While it may only be natural to get attracted towards such high returns, one must not forget the issues of high debt levels, unsold inventory and financing issues that have crippled a number of companies in this sector and therefore the entry into a company in the real estate sector has to structured around the merit of the company’s operations and financial health.
WHO GAINED WHAT AND WHY?
In terms of financial performance the listed real estate companies have not had a sweet run but they did witness a spike at the stock markets recently. While the realty index gained significantly, it was not a homogeneous movement for the constituents within the same. It was the beaten down stocks that led the march as they rose between 25 and 70 per cent. The biggest gainer over the last one month has been Unitech that saw its share price rise by 70 per cent from Rs 15.8 to Rs 27. DLF has been the other major gainer with a 45 per cent jump in its share price. Other major gainers include Indiabulls Real Estate, HDIL and Parsvnath Developers.
However other companies that are relatively less leveraged and have a stronger balance sheet such as Godrej properties, Mahindra Lifespaces, Oberoi Realty have had a muted or more rational run at the stock markets with their share prices rising between 8 and 12 per cent. Experts say that the share prices have risen on the enthusiasm around government getting a clear mandate and hope of economic revival that may benefit the real estate industry too.
“The companies that were heavily leveraged had witnessed downgrades and their share prices corrected significantly. With revival of sentiments in equity markets, shares of beaten down companies have jumped more whereas those that were doing relatively better have seen a more rational investor behaviour,” said a fund manager with a mid-sized mutual fund.
Experts say that the balance sheets of the …continued »