A property development arm, linked to a Hyderabad-based infrastructure group, wanted to make a big-splash in the Chennai real estate market. They zeroed in on a large tract of land owned by the company. With initial market surveys, conducted over six months ago, giving it a positive go ahead, the property entity decided to promote a clutch of high-end residential gated community and initiated talks with a US-based high-end community developer, which was also eagerly looking to enter India.

When the property entity’s representative visited the US a month ago for taking the discussions forward to the next level, the officials of the US firm told him point blank: “This is not the right time to commit big. Let us wait.” The prospective deal has since gone into the cold storage. That sums up the outlook for the Indian real estate sector as a whole. Given the currency crisis impacting a few economies like Greece in Europe and the downgrading of the US credit rating, the economic outlook has created a global uncertainty.

According to B&K Securities' analysis of 17 top real estate firms, the July-September quarter was a mixed bag. While topline came ahead of estimates, the companies showed margin pressure and paid higher than estimated taxes. As a result, profits collectively were down by over six per cent than initially forecast.

Headwinds have resulted in a cautious attitude among real estate investors and corporate occupiers in the third quarter of 2011. The heightened investor demand of the past few months has been tempered by mounting concerns over the handling of the sovereign debt crises in Europe and the US, and increasing doubts about the future pace of global economic expansion.

“Nevertheless, barring significant economic setbacks, such as a major sovereign debt default or a supply related spike in oil prices, we believe the current lull in real estate sentiment is temporary and global markets will return to a more confident stride towards the end of 2011,” says a recent ‘Global Market Perspective’ by Jones Lang Lasalle. It also highlighted the fact that “corporate occupier demand is particularly strong in China and India”.

The appetite for real estate investments has largely subsided due to the slowdown in the Indian economy and increasing real estate prices. In the absence of real estate investment instruments such as Real Estate Investment Trust (REIT) in conjunction with Real Estate Mutual Fund (REMF), the real estate sector suffers from several shortcomings, including less transparency and lower liquidity, observes a recent report by Cushman & Wakefield India.

Although, the market looks positive in the medium term with considerable demand across sectors, the industry seems to be plagued by revised land acquisition policy and rising interest rates. Simultaneously, the end users and developers are feeling the heat of a continuous rise in construction costs and inflation. However, the long-term perspective suggests that the sector will continue to witness demand in all asset classes despite the present economic conditions.

As housing shortage remains a critical element for India, the residential segment will exhibit a buoyant trend. The demand for commercial office space across seven major Indian cities by the end of 2015 is unlikely to exceed or meet the pre-recessionary times, reflecting a gradual recovery mode. As the organised retail growth continues with its steady trend, the demand is expected to rise above the supply levels in 2015. With the Union Cabinet permitting FDI, up to 51 per cent in multi-brands, this will give a further fillip to the sector.

With property developers in India continuing to face a challenging task in raising debts from financial institutions, Cushman & Wakefield says, private equity continued as a preferred investment option for real estate. This trend is likely to continue, as lending norms are likely to be tightened further. However, the growth momentum in real estate will largely depend on the overall economic outlook, the report concluded.

In the given scenario, several leading property developers in the country are facing the onerous task of bringing down their debt, even while looking at avenues to raise further capital to sustain their operations. Companies like DLF are reportedly trying to sell off some assets, including land banks in certain pockets, to bring down their debt burden.

Mahesh Nandurkar and Abhinav Sinha, analysts at CLSA said: "Bank credit growth to property sector has slowed to 12 per cent YoY in September 2011 from 23 per cent in March 2011. Credit grew just one per cent QoQ. Excluding DLF, listed property companies gross debt declined one per cent YoY – part of it forced by tough financing conditions. Our recent management interactions suggest that difficult cash situations have led to asset sales. We lower earnings estimates by three to 21 per cent to reflect the tough credit environment. We prefer companies such as Oberoi, JP Infra and Sobha who have strong balance sheets and cash flows."

The focus, according to him, over the coming six months is likely to be on macro issues with all eyes on a possible peaking of interest rates and easing of the regulatory overhang.

Stock performance

Real estate stocks have been hammered this year with most of the constituents of the BSE realty index losing half of their market capitalisation as they had on December 31, 2010. HDIL, Unitech, DB Realty and Anant Raj have plunged 66.46 per cent, 65.18 per cent, 65.16 per cent and 57.22 per cent, respectively. Indiabulls Realty, Parsvnath Developers and DLF declined 54.82 per cent, 41.16 per cent and 30.14 per cent, respectively.

Sobha Developers and Oberoi Realty declined 29.05 per cent and 14.24 per cent, respectively, while bucking the trend, Godrej Properties have gained 7.24 per cent for the period.

“Managements have portrayed a cautious outlook on the backdrop of challenging environment with several headwinds like tight liquidity, sluggish sales and approval delay. While demand from IT/ITES sector is yet to be impacted by global concerns, managements remain watchful of the near future,” said Brokerage Motilal Oswal Financial Services in a note. However, the real estate sector views the recent relaxed FDI norms in retail sector as a positive development from a long term perspective.

Brokerage house, Sharekhan believes the real estate players who had either shelved or slowed down their plans to build malls and shopping complexes over the past few years might look at reviving their plans once again as there would be huge demand for quality real estate over the next two years.

A rise in demand will act as an incentive for real estate developers to make big investments. Further, it would help current mall owners to fill up high vacancies and fetch better pricing, the note added.

Phoenix Mills will be the largest beneficiary. The other real estate players to benefit would be DLF, Unitech, Oberoi Realty and Housing Development & Infrastructure.

govardand@mydigitalfc.com