The country’s leading real estate companies are likely to lower part of their earlier profit figures as the dwindling income levels of home buyers may force some of them to walk out of booked projects, analysts said.
Last month, Mumbai-based Lok Housing and Construction had said it would restate its accounts for the past three financial years as the revenue it booked hasn’t materialised after the investors and buyers backed out of its projects. Lok plans to write off Rs 225.01 crore worth of profit and Rs 282.14 crore of sales it recognised in its books in the previous financial years.
According to a Credit Suisse report, developers such as DLF, Parsvnath and Orbit have over 20 per cent of their revenues booked since financial year 2006-07 as outstanding from customers and some of these transactions could be cancelled leading to write offs.
"Wherever possible, the customers are looking to walk out of transactions entered at the peak of real estate market,'' the Credit Suisse report said.
DLF, the country's largest developer, had recently cut home prices by 13-14 per cent in its Chennai project 'Garden City' to prevent large scale cancellations, Credit Suisse said.
Construction-to-power group Lanco had reported bookings of 4 million sq ft at its 6.7 million sq ft Lanco Hills project in Hyderabad-based Lanco Hills. As on December 2008, the bookings were down to 2-2.5 million sq ft. The company has cited the inability of buyers to pay in a challenging macro environment, to be the reason for cancellations, the report said.
The profits of real estate companies have increased multi-fold since FY06 on account of the revenues being recognised on a percentage completion method.
However, this has also led to an increase in receivables as cash inflows have lagged the revenue recognition.
"Given the falling property prices, economic and job uncertainty, the inability of buyers to pay and investors backing out in anticipation of better deals, some of these transactions could be cancelled leading to the previously recognised profits being written off,'' the brokerage said.
Though the real estate developers denied any immediate need to restate their books, they said they may have to write off their profits if the buyers take more-than-expected time to pay for the booked property. "As of date, we have not found any cancellations or resized our transactions. There is no possibility of restatement at this point of time. However, customers may back out of projects, which could hit real estate companies like us. In the last quarter, we did not get any funds from our customers. If customers do not pay any money in the next three-four quarters, we may have to write off our revenues accordingly,'' said Ramashraya Yadav, head of finance at Orbit Corporation, a Mumbai-based developer.
Both Parsvnath Developers and DLF denied any need to restate their books, saying the customers have to pay the money after they enter into agreements with developers for their properties. "Until we receive money from buyers, we do not recognise revenues in our books,'' said Parsvnath chairman Pradeep Jain.
"If buyers do not pay the agreed money, their booking amount gets forfeited,'' said a DLF official.