Real estate rally loses steam

Realty Index which had gained 50% in 2012, fell 16% in a week

After a sharp recovery in the first one-and-a-half months of the calendar year — the Bombay Stock Exchange (BSE) Realty Index gained over 50 per cent, real estate stocks seem to have lost steam. The index, which tracks property stocks, has lost 16 per cent since last week, while the broad-based BSE Sensex has lost five per cent.

“These are high Ebitda (earnings before interest, taxes, depreciation, and amortization) stocks. There had been a sharp rally in real estate stocks…Hence, sell-off has been sharper. I am not surprised by this correction,” said Rikesh Parikh, vice-president, equity strategies at Motilal Oswal Securities.

HDIL and DB Realty, which had gained 124 and 92 per cent, respectively, till February 16, have lost 24 per cent each since last week. Sharan Lillaney, equity analyst at Angel Broking, said, “Fundamentally, no change has taken place and developers are still seeing fund crunch.”

According to a recent report by Kotak Institutional Equities, net debt of large developers such as DLF remained flat in the December quarter, though these companies sold non-core land parcels to reduce debt and most cash flows went towards interest payment.

Coupled with high interest rates, uncertain economic conditions and high property prices, absorption of homes more than halved in cities such as Mumbai and the national capital region last year.

The BSE Realty Index lost 28 per cent in 2011. “There is no reason for these stocks to rise. The cost of borrowing for developers has gone up, launches have reduced and the sales velocity has come down sharply. By the looks of it, I don’t think things are going to revive any time soon,” said Amit Goenka, national director, capital transactions at Knight Frank, a global property consultant. In the coming days, the Reserve Bank of India (RBI)’s policy action and budget announcements could have a major impact on the movement of realty stocks, analysts say.

“Though most expectations were factored in the last rally, any positive announcement in the Budget and any surprise rate cut by the RBI can have a positive impact on realty stocks…However, we do not believe any rate cut will be there in the next RBI policy,” Lillaney said. The apex bank left key policy rates unchanged in the last two policy announcements after increasing interest rates 13 times to tame inflation hovering above nine per cent. It said rates had peaked and “further actions were likely to reverse cycle”. Ajay Parmar, co-head, investment banking, Emkay Global, said, “Broadly, it’ll depend on rate cuts, which will reduce easy monthly instalments of home loan borrowers and benefit real estate companies.”