Movement in BSE Realty vis-à-vis BSE-500 (Q4 FY09)
The real estate sector has been in the grips of a sharp slowdown since the beginning of 2008, with sales having fallen drastically in the last quarter. Lower sales hit developers’ cashflows, while unavailability of bank credit and funds from private equity squeezed them further, forcing most of them to delay projects and lay off employees. The realty sector is a big employer and a key source of demand in a variety of other sectors, and the government has been keen to lift this industry to spearhead a wider economic recovery. If the fourth quarter results are any indication, it’s clear that the ongoing economic slowdown has dented cash position and eroded profitability of real estate developers. Realtors, big or small, have reported a steep fall in their net profits. About 93% of the companies belonging to BSE realty indices posted negative results for Q4 FY09 triggered by reduction in demand and buyer’s expectations of fall in prices.The reason for the slide in profit in the fourth quarter was tight liquidity conditions as demand had slowed down considerably across all segments. Declining profits have left the developers in acute financial stress. To tide over the financial crisis, they are mulling various options including selling some of their assets to raise money. In the coming quarter, developers would be mainly concerned with increasing cash flow into their account books. However, developers admit that their liquidity flow will become steady only when the retail sales pick up and the end-users start making property purchases.
Realty in Q4 FY 09
The present situation is very different for the entire real estate sector from the boom that the sector had been seen in the past few years. The real estate industry has moved from a period of abundant capital availability to times of liquidity crisis. The current economic environment has affected sentiments at a macro level, with demand from both, home buyers as well as corporates being affected.
DLF Ltd, the country’s biggest real estate developer reported a 95.32% fall in its fourth-quarter profit as buyers deferred purchases and the company was forced to offer discounts to customers at its residential projects. Profit dropped to Rs 29.86 crore in the three months ended March 31, 2009, from Rs 638.55 crore in the same quarter a year earlier. DLF’s revenues slumped 96.56% to Rs 55.53 crore from Rs 1,613.32 crore in the corresponding period of the previous year. Earnings before interest, depreciation, tax and amortisation also plunged 66.62%, to Rs 298.01 crore from Rs 892.90 crore. DLF has estimated that its full-year consolidated revenue will see an impact of Rs 688 crore because of the discounts it offered to customers of its residential projects in Chennai, Bangalore and Gurgaon.
Performance of BSE Realty index companies (standalone) in Q4 FY09
While the company expects the demand scenario in the residential space to improve progressively, the outlook for the commercial business continues to remain weak, given the global cues. DLF also witnessed marginal cancellations in some of its existing pre-leased space across the country. The company has also decided to exit its large township projects in Bidadi and Dankuni. Similar actions are being contemplated for other long-gestation projects/assets, including hotels. As a result of this, the total developable area has dropped to 425 million sq ft (MSF) from 751 MSF a year earlier. A total of 36 MSF of projects’ area is under construction at the end of the fourth quarter.
DLF stalls a fourth of its projects… DLF, the country’s biggest real estate player, suspended work on more than a quarter of its commercial projects in a bid to save costs as demand for homes and offices slows. The company halted construction work on nearly 16 million sq ft of office and retail mall space out of the 62 million sq ft of planned construction. In the office space, the developer has stalled construction on nearly 12 million sq ft of office space out of the 36 million sq ft of space being planned. the projects are likely to remain suspended until its finances improve and there is a demand push.
8 new SEZ proposals cleared… The Board of Approval for Special Economic Zones approved eight fresh proposals for establishing SEZs across the country in January, while deferring a decision on Larsen & Toubro-promoted SEZ for IT/ITES at Pawai, Mumbai. The board gave formal approvals to three IT/ITES SEZs, out of which two would be located in Tamil Nadu and one in Maharashtra. A port-based SEZ, including port development, has been approved for Karaikal Port Pvt Ltd in Karaikal district, Puducherry. JSW Aluminum-promoted SEZ for aluminium sector and a multi-services SEZ promoted by Navi Mumbai SEZ Pvt Ltd have also been cleared. With these, the formal approvals for SEZs have crossed 550 out of which 278 SEZs have already been notified.
DLF staggers SEZs on fund crunch… DLF, which asked the government to cancel the approval for an IT special economic zone (SEZ) near the capital city, may start five of its other SEZs after 2010 on an expected revival in demand for real estate. The proposed SEZs are in Khurda district in Orissa, Kancheepuram in Tamil Nadu, Kolkata in West Bengal, Sonepat in Haryana, Gandhinagar in Gujarat among others, according to the list of SEZs notified by the government.
Residential Real Estate Prices to go down by 5 to 10%... Scarce buyers and people waiting for prices to come down has forced property developers to reduce the prices of houses by 5-10%, a move which they feel will bring people out who have wait and watch attitude. The premium properties that cost over Rs 3000 per square feet will come down by 10% and the affordable housing sector will see reduction in price by 5%.
Realty on bourses
The BSE Realty Index and BSE-500 both have given a negative return of 31.37% and 2.04% respectively in Q4 FY09.
The quarter witnessed a significant price fluctuation in the realty sector. The realty index offered a maximum return of 97.25% between its highest & lowest levels. It touched its highest level 2,559.92 on 5th January while it was the lowest on 9th March at 1,297.82 whereby BSE-500 moved 31.21% between the highest and the lowest prices.
In the month of January, both BSE-500 and BSE Realty gave negative returns to the tune of 26.65% and 4.73% respectively. The same happened with the month of February as BSE Realty gave a negative return of 15.28% and BSE-500 showed a return of -5.68%. During March, BSE Realty outperformed BSE-500 giving 10.45% & 9.02% returns respectively.
PE of BSE Realty Index at the end of Q4 FY09 was 8.15 whereas BSE-500 had PE of 13.93.
During Q4 FY09, out of 14 companies listed on BSE Realty Index, Only 1 company posted positive returns. Akruti City Ltd was star performers on the bourse giving return of 7.88% whereas Anant Raj Inds. Ltd was the worst performer on BSE as it registered a negative return of 54.45% during the quarter. DLF Ltd. and Housing Development & Infrastructure Ltd. followed in with a negative return of 40.69% and 36.98% respectively.
With poor global macro environment constraining demand, India’s Real Estate has significantly underperformed the market with stocks trading at lower level.
The realty sector worldwide was the worst hit by global crisis as the subsequent housing market slowdown in the US and UK. Realty sector has been witnessing a slowdown in demand across the entire world. Commercial and retail segments both recorded sluggish sales. Faster economic growth in Brazil, Russia, India and China (BRIC) could result in the property markets of those nations recovering at a faster rate than the UK and US real estate markets. It has also been suggested that India's property sector could begin to improve from late 2009 and may attract up to USD 12.11 billion in real estate investment over a five-year period.
With prices correcting across various segments of realty sector and the series of rate cuts by RBI to bring down interest rates, the sector seems to have bottomed out with fewer chance of sliding further. Though a slight fall further can not be completely ruled out. Realty firms have been keen to concentrate on middle income group housing to keep the demand ticking. This trend might continue for a while too woo retail buyers.
Rural housing may help battered realtors reverse fortunes… Low-cost housing in rural areas provides a great opportunity for battered real estate developers, and public-private partnership (PPP) is the most viable business model for such projects, says a recent report by industry body Assocham. The study says the PPP model will help the cash-strapped developers, who are finding it difficult to fund their projects on a standalone basis. The working group on rural housing for the 11th Plan has estimated a shortfall of 47.4 million rural houses. “There is a huge backlog of house requirement, which needs to be fulfilled,” said Assocham president.
PE flows to realty mart may start again... Private equity (PE) funds may revive their interest in the real estate sector this year, after a lull of six to nine months, as valuations of properties have dropped by a third, making them attractive for investors. Most of the funds have not signed any deals in the past few months as realty prices fell sharply and economic slowdown deepened across the world, which slowed the flow of funds significantly. PE flows into real estate have fallen 61% in 2008 as compared to 2007. In 2008, PE funds have invested USD 3.4 billion in the domestic real estate as against USD 8.7 billion in 2007.
Easier FDI rules for real estate likely… To ease the flow of FDI into real estate, the government is mulling a proposal that mixed development projects should be exempt from the minimum capitalisation and area development norms. Current rules allow 100% FDI in such a project, provided it has been capitalised at USD 10 million or more has in its possession at least 25 acres and proposes minimum built-up area of 50,000 sq ft. Under the proposed policy, the government is seeking to exempt such projects from the USD 10 million requirement, reduce the project size to 10 acres and cut the minimum built up area to 10,000 square feet. All FDI brought to these projects will continue to have a lock-in of three years after the date of completion of the project.
Tuesday, June 2, 2009
Sector Analysis : Realty
Posted by Morgan at 8:21 AM