Business Today

Realty stocks: Not going through the roof

The pick-up in demand for commercial space is good news for the estate market and realty stocks.

R. Sree Ram | Print Edition: October 31, 2010

Investors seem to be cheering on the market recovery. They, however, seem less enthusiastic about the fate of the real estate sector and realty stocks continue to languish. So, while the Sensex surges this year, the BSE Realty Index, a basket of 13 real estate companies, has corrected by 12 per cent. In 2009, too, when the markets began to recover, the BSE 500 Index registered a growth of 90 per cent, but the Realty Index gained 69 per cent only.

The reason for the continued realty underperformance is largely attributed to the slow pick-up in office/commercial space and high-end residential properties. The commercial property business is actually facing a glut.

According to analysts at Morgan Stanley, about 42 million sq. ft of commercial assets are lying vacant. Over the next oneand-a-half years, another 70-80 million sq. ft is expected to become available in the market.

The luxury housing segment, which helps real estate companies earn higher margins, has shown an insignificant increase in demand. A recent survey by ICICI Securities points out that 64 per cent of the demand for residential properties is concentrated in the Rs 15-45 lakh segment.

Only 10 per cent of the respondents showed interest in buying a property that costs more than Rs 65 lakh. However, things are expected to change soon with business activity picking up. The demand for commercial and residential property seems to be improving gradually in metro cities. Between April and June 2010, the overall approvals by HDFC, India's largest mortgage lender, had gone up 30 per cent. Gauging the mood of the market, most developers are concentrating on small properties (under Rs 45 lakh).

The extension of cheaper home loan rates by lenders is also helping real estate companies close deals faster. First-year home loan rates have come down to 8-8.75 per cent, compared to 11-13 per cent in 2008. Bangalore-based CoreLogic, an analytics and financial services firm, expects the home loan market in India to grow at 12-15 per cent over the next few years. Even though the Reserve Bank of India is considering steps to absorb excess liquidity from the system, lenders are not expected to raise interest rates substantially due to slow pick-up in credit offtake. An example is the extension of teaser home loan rates by HDFC, which relaunched a loan product that caps interest rate at 9.5 per cent till March 2012.

Also, as companies in other sectors begin expanding their businesses, the demand for commercial properties is expected to steadily improve over the next two years. According to an industry study, realtors in the seven metros leased out 14 million sq. ft in the first half of 2010. The figure is expected to reach 28 million sq. ft by the end of 2010.

The residential property business is also recovering and analysts expect companies with a good mix of commercial and residential to do well over the medium term. Stocks of companies such as Sobha Developers and Puravankara Developers, which have substantial residential property businesses, are up by over 24 per cent each.

Some of the stocks that show promise are Housing Development and Infrastructure Ltd (HDIL) and Indiabulls Real Estate. HDIL has both residential and commercial businesses and reported a jump of 118 per cent in profit for the April-June quarter. According to brokerage house Anand Rathi, it has a land bank of 221 million sq. ft, while brokerage firm Prabhudas Lilladher states that the company is planning to launch 5-6 million sq. ft of projects in 2010-11.

"HDIL's re-entry into the mass residential segment has paid off well, with stock worth Rs 4,000 crore sold in the past five quarters. The company will realise Rs 1,200 crore from existing sales in 2010-11," notes a report by Anand Rathi.

Indiabulls Real Estate has been weighed down for sometime by the slow deployment of cash and delays in project execution. However, analysts are confident that winning two mill land auctions and an aggressive development of its residential property business will help to bolster revenues. Concerns about over-capitalisation and lack of operational visibility have been addressed through a successful deployment of surplus cash, steady sales, the execution progress across projects and strong recovery in the commercial vertical, according to a research report by Motilal Oswal. "We are revising our recommendation from neutral to buy," says Siddharth Bothra, an analyst with the brokerage.

Though the real estate sector is showing signs of revival, it will take time for the positive momentum to translate into higher stock prices. Realty stocks will enter a bullish phase only when there is a robust pick-up in the commercial or office space business where developers have huge inventories. So, plan for a balanced portfolio. For now, do not go overboard on stocks but do pick up one or two realty stocks to gain from potential upsides.
Money Today

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