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Economy Dec 10, 2012

Psst: The worst might be over in the realty slump

By Sunainaa Chadha

Will India's real estate sector finally be out of its slump in 2013?

On the face of it, it looks like real estate companies will continue to post a drop in profits, as they have been doing for the last seven quarters. But sale momentum has seen an uptick in the second quarter of FY13.

While the revenue declined by 18% in Q3FY12 and 9%
in each of Q4 FY12 and Q1FY13, the margin of
decline in Q2FY13 was lower at 4%. Source: Knight Frank

According to a report by real estate research firm Knight Frank, the revenues of India's top 25 realtors have declined 4 percent cumulatively to Rs Rs 6,744 crore in the second quarter of FY13 on a year-on-year basis, highlighting the slump in the real estate sector. However, the slide in the sales momentum of the industry witnessed until Q3FY12 has come to a halt now with realtors switching focus to the residential market which even in this tough economic environment fares better in comparison to commercial real estate.

The optimism is also evident from the fact that many developers recently announced investments of nearly Rs 8,000 crore on projects over the next four years, while several companies with large debt like DLF are looking to cut debt significantly by selling non-core assets. The realty major however, will launch three to four projects in Gurgaon by March 2013.

While Supertech will invest around Rs 5,500 crore to develop housing projects and acquire land bank in NCR and Uttarakhand, Ansal Properties and Infrastructure announced an investment of about Rs 1,500 crore in 2013-14 as capex on construction of various projects across the country. The NCR-based company, which currently has a borrowing of Rs 1,350 crore, aims to become debt-free in the next three years with the help of internal cash flows.

"While the residential demand in major metros was the primary reason behind this uptick, improvement in state of project approvals in some western markets also helped the cause. On the backdrop of improved sentiment many developers accelerated residential project launches," said Samanthak Das Director - Research & Advisory Service at Knight Frank.

Net profit margin deteriorated by 135bps to 14.6% in Q2FY13 vis--vis 16% inthe same quarter last year. Source:Knight Frank

While operating profits have grown 2.7 percent on a consolidated basis, overall profitability remains a concern due to the high funding cost. High interest charges and double digit funding costs resulted in eroding profitability of these companies.

"The net profit of the top 25 real estate companies has consistently declined in the last seven quarters, from Rs 1,303 crore in Q4FY11 to Rs987 crore in Q2FY13," the report said.

This is because of the acute funding crunch. While lenders became wary of doling out cash to developers, even private equity players who were aggressively buying stake in projects have become cautious over the last six months after several PE exits became next to impossible due to the slowdown.

Following a steep rise in valuation of 58 percent year-on-year during the second quarter of 2011, the value of investment-grade real estate under construction in India has grown by a mere 8.6 percent, says Hariharan Ganesan AVP - Research & REIS, Jones Lang LaSalle India."Between then and now, the country's real estate market has traversed from a great deal of positivity to uncertainty."

Given that the finance minister has moved from an earlier hawkish stance in his message to banks about coaxing real estate developers for reducing prices, to a dovish stand of easing lending norms to the ailing housing sector, and the RBI's indication of a cut in policy rate in the ensuing two quarters, the realty sector could possible get a major funding booster in 2013.

Bank credit to the housing sector has grown by only 12.1 percent year on year as per latest RBI data, which is much lower than the 15.9 percent growth rate of aggregate bank credit.

On Saturday the National Housing Bank said it will provide a Rs 9,000 crore refinance assistance to institutions in the home loan business in the nest six months, 90 percent of which will for houses priced below Rs 25 lakh.

The Reserve Bank too recently turned down banks' demand for restructuring stressed real estate loans without providing for potential losses, a move that could pressurize builders to lower prices as banks push to recover loans. ( More about that here).

Even the festive season failed to revive property registrations. Despite aggressive marketing and great offers made by developers during Diwali eve, investment in properties have remained lukewarm due to high prices of houses.

Given the sluggish demand, the real estate industry association CREDAI has now urged its members to slash home prices, and real estate developers, reeling under an inventory pile-up and huge debts, may resort to cutting prices in select projects and areas in the Mumbai and NCR. ( Read more here)

Chart: Liasas Foras

According to real estate consulting firm Liases Foras, Mumbai Metropolitan Region has around 136 million square feet of inventory (overall new launches and carried forward inventory from precious quarters) while NCR has unsold inventory of 268.4 million square feet in the second quarter of FY12-13. Says Pankaj Kapoor, MD at Liasas Foras, "MMR will take more than three years (39 months) to clear this unsold stock, while in New Delhi it is a little over two years at 28 months. A healthy market maintains only eight month inventory, which means these markets are highly speculative since prices have not come down despite so many unsold flats."

Even Arun Puri, country head, Jones Lang LaSalle India observes that while there is no price correction on the cards,the quantum of appreciation has definitely reduced significantly in all the top seven cities of India in 2012.

And given the new found love of investing back into the Sensex, realtors may soon lose some of their speculative investors too.

by Sunainaa Chadha

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