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Poised to zoom

R. Sree Ram     October 29, 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.

Is it time to stock up?

Some of the stocks that show promise are Housing Development and Infrastructure (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 in the mass residential segment has paid off, with shares worth Rs 4,000 crore sold in the past five quarters. The company will realise Rs 1,200 crore from the sales executed in 2010-11," notes a report by Anand Rathi.

Indiabulls Real Estate has been weighed down for some time due to slow deployment of cash and delayed project execution. However, analysts are confident that its winning of two mill land auctions and aggressive development of residential property business will help to bolster its revenues.

"Concerns about over-capitalisation and lack of operational visibility have been addressed through the successful deployment of surplus cash, steady sales, execution progress across projects and a strong recovery in the commercial vertical. We are revising our recommendation for this stock from neutral to buy," says Siddharth Bothra, an analyst at Motilal Oswal.

Though the real estate sector is showing signs of revival, it will take time for the positive momentum to translate into higher stock prices as consumers are not in a hurry to buy property.

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, don't go overboard on stocks, but do pick up 1-2 realty stocks to gain from a potential upside

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