Realty: Some positives but no recovery yet

Outlook remains muted despite positive trend in office segment

The realty segment has been one of the most impacted in the recent market sell off, losing about 12 per cent over the past month and under-performing the broader markets as well as most other indices.

Investors have been avoiding risky bets and the sector, given its high leverage, has been among the first to get impacted. Earlier this month, Moody’s Investors Service said the country’s largest property developers will continue to face a challenging operating environment over the next year due to weak cash flow, flat sales and stagnant prices.

Muted sales have led to record inventories across major locations. Moody’s, however, believes that developers in Mumbai and Delhi such as Indiabulls Real Estate, Lodha Developers, Unitech, DLF and Oberoi Realty will experience relatively more pressure on sales and cash flow because of high prices in these locations. A fall in interest rates will make loan payments easier and is seen as one of the key triggers for a revival. However, what will outweigh this gain are high home prices and decline in savings rate, believes Moody’s.

While rising inventory is also an issue in the Bengaluru region, the situation is better in the southern city. While the job market continues to be strong, analysts at J M Financial say the performance of the region and the key monitorables will be improvement in IT hiring and continuation of e-commerce led job market boom.

The only bright spot in an otherwise gloomy scenario is the interest of global investment firms such as GIC, Singapore’s sovereign wealth fund, which has committed about Rs 2,000 crore in two DLF projects in New Delhi. This is the single largest project-specific investment in DLF, which is expected to help the company lower part its debt of about Rs 21,500 crore. While analysts believe that debt has probably peaked out this year, they expect the company to lose Rs 500 crore on operations per quarter.

The other positive is the strong 39 per cent growth in office space over the past year. Elara Capital expects net absorption which was at 30 million square feet in CY14 to be maintained in CY15-17. Given the strong absorption in the Bengaluru market, the brokerage prefers companies with a ready portfolio of office assets. The residential market in comparison has seen much slower offtake. Given the robust office segment, analysts are bullish on Bengaluru realty players.