Sensex & realty
After reaching a trough of 8,160 points, the recent turnaround in stock mark with Sensex zooming past the magical 20,000 mark, may cheer up India Inc., but it has certainly not lifted the sagging spirits of the real estate market.
Here, what's significant to note is that many real estate companies made fortunes during the earlier bull run of 2006-08. But the present bull run has bypassed these companies. This is clearly established by the sector index which registered a double-digit increase during the previous bull run but nosedived by over 4 per cent this year.
Despite buoyancy in stock market and GDP growth, real estate sector is not able to match the pace of economic upturn. Stocks of the many listed companies which brought out their IPOs during the boom time are trading much below the offer price. In some cases, there's an erosion of 40-50 per cent where peak stock prices of few stocks have crashed upto 300 per cent.
So much so that even the wealth of india real estate barons has been considerably eroded. The wealth of KP Singh, the premier of India's number one real estate company, DLF has gone down from a whopping Rs 1,36,925 crore to Rs 48,536 crore, between October 29, 2007 and September 21, 2010 (two crest periods of stock market), registering a fall of over 64 per cent. Similarly, the personal wealth of Ramesh Chandra, the promoter of country's second largest real estate firm, Unitech, has plummeted from Rs 4,4510 crore to Rs 10,049 crore, a fall of over 77 per cent.
This scenario is not favourable for a number of real estate IPOs in the pipeline. About a dozen realty companies are deferring their offers despite getting regulatory approvals and the fate of another half a dozen players who are awaiting final nod is no less uncertain. And if these IPOs, (largely meant for debt-clearing and funding land purchase) fail to materialise, it will spell more financial trouble for these realty players that are struggling to cope with serious debt problems.
Despite some revival, cash flows of developers have not yet stabilised. And to make matters worse, banks are not keen to either give new loans or restructure the old loans due to mounting bad debts. As a result of that, developers are going in for high cost non-banking funding options to meet their capital requirements.
Amidst these funding woes, developers are further hit by cooling of demand due to rising property and mortgage prices. While various industry surveys establish that the maximum (85-90 per cent) demand is for mid to affordable housing, this latent demand has been adversely hit by unrealistically high prices. A HDFC Securities survey has already pressed the panic button in its report stating that sharp increase in property prices is adversely impacting the absorption of over 260 million sq ft of residential property in key metros. So much so that analysts are also openly questioning the sustainability of real estate market amidst investor-driven sales and over supply situation.
Are we heading for a double dip situation? There is a real danger of it considering that all the ills which are currently plaguing the sector are the ones which were responsible for the slowdown in 2008-09. Leading real estate IPC JLLM has already cautioned against the possibility of property bubble developing by Q4 2010 end.
Surely, it is time for real(i)ty check. Real estate players have to put their house in order lest they fritter away the gains of realty revival and head for another round of recession. Clearly, end-users and long-term investors hold the key to sustain the market.