Hopes sprout as govt seeks to revive realty

The real estate sector challenges over the past few years have broadly been in two areas— demand stagnation and debt overhang among corporates (fallout of the past decade’s growth). There are encouraging signs on both these fronts since the last year.

The demand side is likely to benefit from structural factors like enactment of the Real Estate Regulator (RERA) Act and cyclical factors such as moderation in interest rates and muted price increases, RERA has the potential to bring in greater transparency, improve the bargaining power of the consumer (vis-à-vis the companies) and be a key enabler of genuine demand over the longer term.

Real estate companies have been attempting to improve their stretched capital structures by exiting unrelated business diversification (undertaken during the boom years), pursue new projects through the joint development model and selling stakes in income generating properties. Progress on this front has been quite encouraging for certain companies. On the other hand, the government has been working on creating an enabling environment for the launch of Real Estate Investment Trusts (Reits). Well-developed markets for Reits will enable the real estate companies to monetise their income generating properties help improve their liquidity and reduce their debt burden. Recent decisions by the Securities and exchange board of India (Sebi) have eased some of the constraints, which should aid the development of Indian Reits market (estimated to be $45-50 billion).

Another fallout of stressed balancesheets has been supply constraint on capital heavy projects like malls, A-grade commercial properties and hotels. Cyclical economic recovery may lead demand creation for these assets (positive for price appreciation) and help real estate companies.

Companies with good pricing discipline, execution capabilities in their focused markets and healthy capital structure (or making steady progress in reducing debt) are likely to be an interesting opportunity over the next two-three years.


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