Operating margins of realtors under stress

Operating margins of real estate companies will be under pressure in the coming quarters with a rise in the cost of funds for companies, an increase in the raw material costs along with a possible drop in sales due to the hardening of home loan rates.

During the post-recession period, operating margins of realtors have witnessed a 10-15 per cent rise with the increase in the average realisation per square foot.

“This is a challenging phase and the companies may feel some kind of pressure on their operating margins due to the hardening of interest rate along with a rise in the raw material prices,” Venkat K Narayana, chief financial officer of Prestige Projects Ltd, said.

 

He, however, said margins of the already launched projects, which have generated a good amount of sales volumes, would not be affected.

To contain the spiraling inflation, the Reserve Bank of India has raised repo and reverse repo rate 25 basis points in its January credit policy review. This hike has subsequently led to a 25-50 bps rise in lending rates from the commercial banks. Further, steel and cement prices have witnessed an upward trend in the last three-six months. Steel prices have gone up around Rs 5,000 per tonne since December and cement prices have also seen a Rs 50-100 rise in the last six months. “There will be pressure on EBIDTA margins as headroom for higher sales realisation is less on the back of the rising raw material prices along with the rise in interest rates,” Shama Sunder, general manager (finance) of Brigade Enterprises, said.

He also said it would all depend on how much cost could be transferred to end users.

“Given the present macroeconomic environment, there is lesser leverage to pass costs to consumers,” he, however, added. Brigade Enterprises will try to reduce the overhead costs in its bid to reduce the operating expenditure to sustain the present margin levels, Sunder said. Referring to this issue, Shobhit Agarwal, joint managing director-capital markets of Jones Lang Lasalle India, said, “Though the cost of debt is rising, sales volumes of the projects is not rising in tandem. Therefore, real estate firms will surely be impacted in the coming quarters.”

He also said the rate of volume growth has reduced considerably over the last two quarters and this trend would continue in the short-term.

On the rise in the cost of funds, he said fund flow for developers was showing signs of drying up and there are presently more borrowers than lenders in the market.

He, however, said non-banking financial companies (NBFCs) and private equity players were willing to fund select projects based on their business potential.

In the meantime, there are contrasting views that don’t expect any fall in operating margins in the present economic environment.

“As far as Sobha Developers is concerned, around 47 per cent of our customers don’t take home loans to buy new properties. Further, 13 per cent of our total customers avail their loan from State Bank of India, which is still continuing with teaser loans despite a rate hike. So, operating margin will not fall despite a challenging environment,” S Baaskaran, chief financial officer of Sobha Developers, said.

He also said, the cost of funding for the company was at 12.5 per cent without any rise in the recent period.

Referring to the rise in raw material prices, he said, “We will try to offset the rising cost by slashing our expenditure on some other raw material.”