REALTY STOCKS -BACK IN RECKONING, REALLY?

By Ruma Dubey

Yesterday, the realty index closed 57 points or almost 3% higher. And today too, realty stocks like Phoenix Mills, Parsvnath, Indiabulls Real Estate, DLF, Sobha and Prestige Estates are up in the green.

This is not just over two days, we have been seen this new found fancy for realty stocks over the past few days, almost a fortnight now. And the fancy does not seem to abate. Earlier, it was felt that it was just a passing fancy but not this relentless pursuit for realty stocks makes one wonder about what exactly in happening in the sector. Is there some news which the market senses, which we mere mortals do not know yet? Or is this just bottom fishing?

Well, the immediate answer is indeed bottom fishing. Realty stocks have been battered down since 2009 and it has never figured out on any sane person’s ‘to-buy’ list.  On the ground, the realty picture has not improved drastically but it is better than the situation in 2009 and that many feel is reason enough to buy. The perception is that buy the realty stocks now so that one can ride the wave when the boom comes.

But the boom time seems a long way off. In and around you itself, how many people do you know that have recently purchased homes? Surely, very few. Today, unless a person really needs a home, literally has no alternative, only then does one seem to buy a home. People have the money, are sitting on cash to invest but the costs are prohibitive. In Mumbai suburbs today, one just cannot buy even a one BHK for less than Rs.50 lakh. Though the likes of Lodha continue to announce one luxury project after the other, how many are really biting?

Though demand remains slack, the realty developers are stubbornly sitting tight on prices; sometimes even raising the price. Property fairs are routine yet there too, you have curious walk-ins but no real sale happening.  Speculators, who are essentially, HNIs and to a large extent, NRIs are being blamed by many by keeping the prices high. Companies report 80-90% sales as soon as the project is announced at a much discounted rate, with a promise that it is only for the ‘early bird’ and later jack up the price to create a notion that demand is robust and prices are high. Many companies today have a lock-in period – early birds who have availed of the discount cannot sell till the project is completed. So if this is not a tactic to keep the prices high, what else could be?  Incidentally, L&T has announced a realty project in Powai and it is planning to quote an astronomical price of Rs.25,000’sq.feet. This price for a place which has some of the worst roads of Mumbai, major traffic congestion and local trains, the lifeline of Mumbai, is nowhere close by for commute. Is this not being inflationary for no reason?

Moreover, PE Funds and many FIIs have got into projects at high prices and are today not able to exit as higher returns. That could also be the reason why we see many ‘research reports’ coming out by various agencies, saying that the realty sector is back to normal. These are mere reports to ensure better exit for those caught. If the sector was indeed back in the league, how come we are not seeing any PE Fund picking up stakes in realty projects like they did in 2007-08?  Can we see some PE Fund taking stake in L&T’s ambitious project?

The market feels that the worst is over and the sector is looking up. Marketmen widely expect RBI to start lowering the rates from 2013 and once that happens, expect demand to pick up. This means people will start buying the moment a 25 or 50 bps rate cut is announced? Unlikely. Just as they waited for the prices in realty to fall, they will wait for rates to come down more. Globally things are not yet settled so till the recessionary fear does not dissipate, stability in realty markets will take time.

Having said all this, the fact also remains that realty companies continue to sit on very high debt. Though some clean-up has happened, the leverage remains high.  Yes, over the next three years, things will be very good but for now, outlook remains cautious.