Poised to zoom

Though real estate is showing signs of revival, it will translate into higher stock prices only when there is a pick-up in the commercial space.

R. Sree Ram | Print Edition: October 2010

Investors seem to be cheering on the market recovery, but appear less enthusiastic about changing the fate of the real estate sector. Instead, the gloom in the property market continues.

So, while the Sensex has gained by 2.5 per cent so far this year, the BSE Realty Index, which comprises 13 real estate companies, has corrected by 12 per cent. In 2009, when the markets began to recover, the BSE-500 Index registered a growth of 90 per cent, whereas the Realty Index registered a gain of 69 per cent. The subdued performance comes after the index declined by 82 per cent in 2008.

The reason for the continued underperformance is largely attributed to the slow pick-up in demand for office/commercial space and high-end residential properties. In fact, the former is facing a glut.

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

The luxury housing segment, which helps real estate companies earn higher margins, has shown no significant increase in demand. A recent survey by ICICI Securities points out that 64 per cent of the demand for residential property is concentrated in the Rs 15-45 lakh segment. Only 10 per cent of the respondents showed an interest in buying property that costs more than Rs 65 lakh.

Glimmer of Hope

However, with business activity picking up, the demand for commercial and residential properties has begun to improve in the metropolitans. In April-June 2010, the overall approvals by India's largest mortgage lender, HDFC, had gone up by 30 per cent. Gauging the mood of the market, most developers are concentrating on small-sized 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 with 11-13 per cent in 2008.

Bengaluru-based CoreLogic, an analytics and financial services firm, expects the home loan market in Indian to grow by 12-15 per cent over the next few years. Even though the RBI is considering steps to absorb excess liquidity from the system, the lenders are not expected to raise interest rates substantially due to the slow pick-up in credit offtake.

An example is the extension of teaser home loan rates by HDFC, which re-launched 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 improve over the next two years. According to an industry study, realtors in the seven metros leased out 14 million sq ft of space 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 expected to lead the recovery and analysts expect companies focused on this segment to do well. Stocks of companies such as Sobha Developers and Puravankara Developers, which have substantial residential property businesses, are up by over 24 per cent each.

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