Weak demand still a problem for realty firms

Interest rate cuts not to help revive demand; developers hold on to prices as PEs ease liquidity

Real estate as an asset class has lost its appeal, going by the financial performance of developers in 2014-15. New launches have been few and far between as demand continued to be sluggish, putting pressure on profitability.

The National Capital Region was worst in launches and elsewhere, too, only a select number announced any — Oberoi, HDIL (in Mumbai), Sobha and Prestige. The broader market continued to show a sequential decline in these.

Demand conditions remained weak, Mumbai being an exception. According to analysts, the Bengaluru market showed a 10 per cent decline in absorption in FY15, though it had shown healthy growth till a year ago. Real estate demand in Gurgaon contracted 40 per cent, marginally slower than the previous year’s 57 per cent fall. Demand in Noida declined 17 per cent. Mumbai was the only large market that grew, by three per cent.

Though commercial operations are improving, analysts do not see a meaningful revival soon. The cash flow situation of most is affected due to poor offtake, which has led to higher gearing. However, while bank funding has dried for the sector, liquidity has not. Private equity firms and non-banking financial institutions are showing a lot of interest in funding at multiple stages.



While some of the older PE funds that debuted in 2007-08 have exited, a clutch of new real estate-focused ones are doing both equity and structured deals with developers, with some even buying out apartments in bulk from developers. These financiers are helping the developers hold on to prices and preventing a sharp fall in real estate prices in many pockets.

The recent interest cuts are unlikely to spur demand, as affordability continues to be an issue in some markets, while demand has saturated in others.

Analysts are selectively optimistic on developers. Kotak forecasts a 20 per cent growth rate for Prestige in FY16 and believes the company’s plans to enter new markets would bode well for growth. Kotak is positively inclined towards DLF, as it thinks the company will show some recovery in the coming year, though debt continues to inch up. DLF is planning to file for listing of a real estate investment trust in FY16.



HSBC believes inventory overhang, rising risk of litigation and insufficient Reserve Bank rate cuts continue to be pain points for developers. The brokerage feels Godrej Properties and Prestige Estate could benefit from a commercial uptick. Oberoi Realty has planned several new launches, which would support cash flows.