Realty sector: In repair mode, or is it reviving?

Economists sometimes speak of the “broken window fallacy” (this is not the same as the “broken window syndrome”, which social scientists also refer to). Suppose that a shop’s display window is broken. Repairs mean business for the handyman, the glass merchant, the hardware shop, etc. Such repairs occur on a much larger scale in a city hit by an earthquake, or a nation hit by war.
 
The aftermath of disaster is often frantic economic activity. If we only see the activity, we may argue the disaster was a good thing since it led to stimulus. That argument is spurious for several reasons.
 
The shop-owner is forced to spend savings on repairs instead of investing elsewhere, for higher returns. He suffers loss of business until the repair is done. On a much broader scale, this is true for citywide disasters, and post-war aftermath.
 
I was reminded of this fallacy recently, while looking at sector-wide performances in the equity market. In the past month, the benchmark Nifty has returned around 1.3 per cent in capital gains. Financial services (this includes banks but also non-banking financial companies or NBFCs of various kinds) have returned 2.2 per cent. Fast moving consumer goods (FMCG) have jumped 4.5 per cent, while media stocks are up 3.5 per cent. At the same time, the one-month return of energy, pharmaceuticals and metals are all negative.
 
However, all these performances are dwarfed by returns from the real estate sector. The National Stock Exchange’s realty index tracks 10 listed real estate players using free-float weight. The index has returned a stunning 10.2 per cent in the past 30 days. The returns are spread out. Nine of the 10 companies have positive returns and eight have returned five per cent-plus. Three, including Delta Corp (27 per cent), Sobha (23 per cent), and HDIL (20 per cent), have returns of over 20 per cent. 
 
What has changed for an industry, which is generally believed to be in trouble? It was hit hard by demonetisation, when the property market froze. Most realtors are struggling to manage high debt, and the consensus is that the industry is over-leveraged.  “The Indian real estate market is currently grappling with a double whammy: One from the cash shortage caused by the impact of demonetisation and the second by the imminent introduction of the real estate regulator. This, along with the increasing refinancing risk, would shake-up the sector, with developers with high leverage losing out,” India Ratings & Research said in a recent report.
 
There could be a few favourable developments in 2017-18. Real estate investment trusts (Reits) are expected to ensure better liquidity for developers because they allow people to invest with smaller corpus. The commercial rentals market and the commercial property market, in general, could see partial recovery. India is also expected to see overseas investments of $4.2 billion equivalent (about Rs 27,000 crore) in real estate, according to Cushman & Wakefield. That's barely one per cent of global real estate investments and a little less than the $5-billion expected in 2016-17. The implementation of versions of the RERA (Real Estate Regulation & Development Act) by sundry states should help improve transparency. The sops for affordable housing in the latest Union Budget could boost that sub-sector.
 
But above all, there seems to be some anticipated variation on the broken window effect. Notebandi led to an abrupt cessation of secondary real estate activity because that market is cash-driven. Anecdotal evidence suggests cash is very much back and the industry could be all set to try and make up for lost time. It’s anybody’s guess if this rebound will genuinely and fully compensate for the loss of business during demonetisation.

The author is a technical and equity analyst