Real estate growth may not be sustained

SECTOR IN THE NEWS

The Bombay Stock Exchange’s (BSE) Realty Index was the biggest loser last week, closing at an all-time low of 1,645.42 on Friday on concerns that the sector’s growth will not be sustained.

The BSE Realty Index declined 18 per cent last week, underperforming the Sensex that dropped 5 per cent. Since hitting its all-time high of 13,614.17 on January 7, 2008, the realty index has declined by a whopping 88 per cent compared to the 57 per cent fall of the Sensex from 20,873.33 to 8,915.21.

Most of the real estate stocks such as HDIL, Omaxe, Parsvnath Developers and Ansal Infrastructure closed at their lifetime low values, while DLF, Unitech, Sobha Developers and Akruti City are trading near their all-time lows on BSE. Majority of the realty stocks are currently trading at price-earning (P/E) ratio of less than 10 times as compared to over 30 times at their peak.

High lending rates and a surge in realty prices sapped demand for homes and apartments, leaving developers in a bind. The Real Estate Developers’ Associations of India (CREDAI) has called for a reduction in prices to overcome the crisis in the sector.

The 14 real estate companies in the index have posted 1 per cent decline in their combined standalone sales income during the quarter ended September 2008, compared to 18 per cent growth reported in the June 2008 quarter. The aggregate net profit of these companies has increased by 17 per cent in the September quarter as against 24 per cent rise reported in the June quarter. These firms have reported a combined net profit of Rs 1,911 crore (Rs 1,633 crore) in the September quarter.

Unitech was the largest loser among the real estate stocks, declining by 30 per cent last week.