Real estate industry still trudging along

Repo rate cut comes as a breather, but the revival prospects hinge on banks’ decision to share the benefit with end-consumers

The Indian real estate and property development industry continues to be in a limbo, with some developers feeling it’s better than last year, as industry witnessed slight improvement in sales in select micro markets across cities. More builders are realising the need to launch a right project in right size at a right price and in the right location as the key to attract buyers.

That apart and with the second quarter of the current financial year just behind us, the decision to cut repo rate by 25 basis points (bps) to 6.25 per cent at the first meeting of the monetary policy committee (MPC) under the new RBI governor Urjit Patel, announced earlier this week has come as a glimmer of hope. It could be the right trigger for an industry sitting on a huge stockpile of residential units across cities and segments.

But the realty sector, which has been going through a sluggish phase for quite, sometime now, feels the move may not be of much help to spur demand and help revive the sector, which has been affected by larger macro-level issues. The note of caution is also due to the reluctance of banks in passing on the rate cuts in full to end-consumers, as one has seen in the past year or so.

“This rate cut has happened for the second time in the current financial year, although after one round of rate cut in April. This shows that the central bank remains cautious in its monetary policies and is carefully monitoring the overall economic scenario before taking steps,” says Anuj Puri, chairman and country head, JLL India, the leading international property advisory firm.

The first question that arises after this rate cut is how it will help improve buyer sentiment in the housing sector, Puri says. The reason for sluggish housing sales is the trust deficit between consumers and developers. Unless RERA and other pro-consumer policies come into play, buyers will continue to be wary. “We can expect only a marginal improvement in sentiment on the back of this rate cut. At this point, there is also no ready answer to the question of to what extent banks will actually pass on the benefit of the rate cut to borrowers,” he wondered.

However, according to him, for the construction sector, greater relief is expected as steel and cement production has been robust as the latest industry production data shows. Thus rising cost pressure that haunted developers earlier may not be a major issue in the near-term,” Puri said.

“The rate cut if passed on by banks would have a positive effect on the residential realty sector in the form of lower home loan interest. Since, the home loan rates have fallen by only 0.26 percentage point since last year, we would like this rate cut to propel banks to cut home loan rates further,” said Anshul Jain, managing director, Cushman & Wakefield, a leading international property advisory.

According to Jain, lower home loan rates could trigger greater optimism among homebuyers and spur home purchasing decisions, for both end-users as well as investors, and revitalise the long-depressed housing markets. The developers can take advantage of softening cost of capital to avail loans at cheaper rates and complete projects, thereby restoring confidence in the market in the long-term too.

“Our concern largely hinges around the past inaction of banks to pass on the full extent of the rate cuts to customers as the lenders may wait for a further 25-50 bps cut that is now expected in the next two-three quarters, if inflation continues with its expected trajectory. If commercial banks quickly pass on the benefits of rate cut to loan-seekers, we can expect a ‘real’ festive season for all stakeholders in the sector as more buyers may actually decide to get off the fence and invest as most developers are rolling out ‘festive offers’ to attract them,” Jain pointed out.

Realty industry body Credai too feels that its high time banks took note of rate cuts and duly passed on the benefits to housing mortgage customers. “The rate cut has set the ball rolling for quite a few sectors, most importantly, for the realty industry. The ball is now in the court of banks and lending institutions. Against the 1.5 per cent reduction of repo rate in the recent past, banks have only passed on the benefit of about 0.5 per cent rate cuts on their loans, indicating a 300 per cent mark up. Considering this imbalance between the current RBI repo rate and interest rates charged by banks, it’s high time that the lag is rectified,” says Getamber Anand, president, Credai National.

But even close to a week since RBI’s repo rate cut announcement, the industry is still awaiting an announcement on this front from the major banks, barring state-owned Oriental Bank of Commerce and United Bank of India that on Friday reduced lending rates across maturities. May be we could expect more in the coming weeks. Housing finance companies like DHFL and a few NBFCs and MFIs have been more forthcoming and expressed willingness to pass on the rate cut benefits to end-customers.

In fact, NBFCs have been more understanding of the plight of developers, sitting on a huge debt burden. A recent report by JM Financial highlighted that several builders under severe cash crunch are getting a breather from debt repayments with some lenders, especially NBFCs offering a moratorium on interest repayments over and above moratorium on principal repayments that builders were already enjoying. This breather has been necessitated by the continuing cash flow crunch among builders, as home sales remain dry in many areas. While principal moratorium can range from 18-30 months, interest moratorium usually is between six month and nine months with a few NBFCs extending it to 12 months in some cases.

At the same time, it noted that benign liquidity is improving holding capacity of builders in a scenario of slowing sales and declining cash flows. “While we see interest rates declining on high liquidity, continued operating deficit is a concern for the sector. We continue to track any changes in NBFC lending trends to identify structural changes in the sector,” it pointed out.

Global private equity capital, Blackstone has been in the thick of news in the latest quarter. It not only is reported to have bought a 800,000 sq ft mall in Coimbatore for Rs 450 crore, it’s also said to be finalising plans to raise about $600 million through a listing of Real Estate Investment Trust (Reit) on the domestic stock exchanges.

Blackstone Group through its joint ventures with Bangalore-based Embassy Group and Pune’s Panchshil is on the road to build to 50 million sq ft of tenanted office buildings, of which 30 million are already leased across top Indian cities. It could target a possible listing during the first quarter of the next calendar year, as per media reports. This augurs well for the retail and commercial office space segments of the Indian realty sector.

On the other hand, Kotak Realty Fund too has invested in a residential project in Chennai by Alliance Infrastructures. The deal in the form of structured debt is for a four-year term and the capital will be used to refinance existing loans. This is in line with the residential segment, which has been attracting more of structured debt than equity. However, big players including K Raheja Corp and Godrej Properties continued to buy large plots across cities including Mumbai and Bangalore, to launch new projects. They seem to see some light at the end of the tunnel for the stagnant Indian realty sector in the quarters to come.

1) Company review: DLF

Business & background: DLF, a real estate development company, develops residential, commercial and retail properties.

Prospects: Net sale of the company rose 81.20 per cent in Q1FY17 from the same quarter of FY16 to Rs 676.17 crore. The net profit of the company stood at Rs 67.46 crore. According to a HDFC Securities report, over the last 12 months, DLF share price has risen 18.5 per cent, outperforming the Nifty by 600bps. Whilst residential weakness in DLF’s key micromarket Gurgaon may result in longish pre-sales cycle, rental arm’s stake sale will be key from the cash flow perspective. “DLF is best placed amongst the northern peers on account of its ability to tie up superior land banks, access to finance, stable balancesheet and high annuity cash flows through the commercial and retail leases,” it added.

Valuation: At Friday’s close, the stock traded at 28.51 times the EPS for the past four quarters.

2) Company review: Sobha

Business & background: Sobha provides construction services like design and architecture, mechanical, plumbing, interiors, residential and civil construction services.

Prospects: Sobha’s sales rose over 28 per cent in Q1FY17 compared with Q1FY16 to Rs 580.1 crore. The net profit, however, took a 20 per cent hit and stood at Rs 36.7 crore. According to HDFC Securities research report, SDL’s operating metrics may improve during FY17E, with pickup in inventory monetisation and improvement in cash flows. This will help deleverage the balancesheet. “We maintain ‘buy’ for the company. SDL’s customer collection from real estate development continues to be stable at Rs 410 crore. The contractual segment contributed about Rs 170 crore,” it added

Valuation: At Friday’s close, the stock traded at 22.03 times the EPS for the past four quarters.

3) Company review: Godrej Properties

Business & background: Godrej Properties, a real estate development company, is currently developing residential, commercial and township projects spread across approximately 11.89 million sq meters in 12 cities.

Prospects: The company saw a 36 per cent surge in the Q1FY17 revenues compared with Q1FY16. Its net profit was up 172.96 per cent in Q1FY17 and stood at Rs 45.83 crore. According to a report by B&K Securities, with residential real estate portfolio moving swiftly, immediate addressable appear to be ability to unlock the capital stuck with commercial real estate portfolio. Efforts remain underway but are likely to take time, as business environment is yet not backing in entirety. “Until we see a visibility on unlocking of capital stuck, we feel it’s prudent to maintain the ‘underperformer’ rating” on the company, the report added.

Valuation: At Friday’s close, the stock traded at 245.1 times the EPS for the past four quarters.

4) Company review: Puravankara projects

Business & background: Puravankara Projects focuses on residential and commercial properties and develops apartments, villas and townships.

Prospects: The company reported 83 per cent decline in Q1FY17 profit after tax compared with Q1FY16. The net profit stood at Rs 4.1 crore. According to a B&K Securities re­p­ort, although the management has time and again ide­n­t­ified its intent to liquidate inventory in nearly completed/ ready-to-move-in properties, so far the pace of liquidation has fai­led to enth­u­se. The sa­me rem­a­ins cr­it­ical for aug­m­enting cash flows. Re­ceipt of appr­ovals for project lau­n­ches also holds the key to provide an uptick to bookings. “Consum­m­ation of the bulk sale transaction, if and when goes thro­ugh, would act as a key trigger for the firm. We re­m­ain optimistic of inventory liquidation and hence maintain outperformer,” it said.

Valuation: At Friday’s close, the stock traded at 13.44 times the EPS for the past four quarters.

(Compiled by Shishir Parasher)


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