Realty IPOs face perfect storm

All the big developers with IPO plans are waiting. They want to raise money for new projects but they are already holding so much inventory,said Surajit Pal,sector analyst at brokerage Elara Capital.

At least 12 real estate firms are suspending their offers despite getting final regulatory approval,according to analysts. Another six to seven firms have filed their draft prospectus. But only three real estate IPOs have hit the market so far this year.

The line-up includes a long-delayed IPO from Emaar MGF,the Indian JV of Dubai8217;s Emaar Properties,a 600 million IPO from Lodha Developers,a 600 million offer from Sahara Prime City and a 515 million issue from Embassy Property.

An unhappy confluence of negatives means the prospects aren8217;t likely to brighten soon for Indian developers and their IPOs.

Land costs are one issue. Land now accounts for two-thirds of total cost in some projects,compared with an average of 40 to 50 per cent previously.

In June,Lodha,among India8217;s top developers by sales signed India8217;s costliest land deal,agreeing to pay 850 million for a plot in central Mumbai. Last month,Indiabulls Real Estate won two plots at land auctions in Mumbai for 430 million,or twice the asking rate.

These are the highest-ever land prices paid at a time when housing prices have already crossed the peaks in 2007,said Sanjay Dutt,chief executive at property services firm Jones Lang LaSalle India.

To get their returns on the high land prices,developers have to push up prices for their housing units.

Only high-end apartments may be possible on these plots,and there is a limited target audience for that,Dutt said,referring to the land auctions in Mumbai.

RUNAWAY PROPERTY PRICES

According to an ICICI Securities survey across eight major Indian cities last month,nearly 72 per cent of respondents believed property prices were unaffordable.

Government data estimates India8217;s housing shortfall at 26.5 million units,with almost 90 per cent of this requirement in the mid-to -affordable segment,comprising of homes costing less than 3 million rupees.

Also,investors8217; appetite for real estate shares has come off. The sector index has declined 4.2 per cent in 2010 compared a 14 per cent rise in the broader index.

In 2006/07,more than a dozen developers hit the market with equity issues,but most stocks still trade near or below their offer price.

There is only selective appetite for real estate offerings,said Deven Choksey,chief executive at K R Choksey Shares,which manages about 130 million for Indian clients.

Investors are only confident about well-known developers in major markets like Mumbai or Bangalore. Not too sure of prospects for the others.

Interest rates are also on the rise. There have already been a spate of interest rate raises on home loans.

Last week,India8217;s central bank lifted interest rates by a more-than-expected 50 basis points,its fifth rate increase since March.

Still,Asia8217;s No.3 economy is set to grow 9 per cent this fiscal year which could fuel demand down the road. Almost half of the respondents in the ICICI Securities survey planned to buy property if there was a correction.

Some analysts are starting to see interest resume at the high end of the market. This could benefit big developers including DLF and Indiabulls Real Estate.

Among the IPO hopefuls,analysts rate Oberoi Realty,Raheja Universal and Prestige Developers as the companies more likely to hit the market,given their medium-size offerings and strong presence in a single key property market.