The market has beaten down shares of real estate companies over the past three months, as news of over-supply, weak demand and regulatory action kept coming. Analysts claim they are bored with all this talk of gloom and doom because the situation on the ground is not as bad as it was in 2009. They say channel checks by them in different markets suggest sales have not plummeted in a meaningful way across the board, despite an extended monsoon and drop in new launches. Undoubtedly, there is stress but this is visible in markets where prices had run up significantly and supply had also increased correspondingly. These markets would see a correction. With sales volumes improving and with better cash management strategies of players, analysts believe companies are in a better position now than before.
Analysts believe even though the BSE Realty Index has underperformed the Sensex by 21 per cent over the past three months, things are not as bad as 2009 because real estate companies’ balance sheets are in a better position than they were then and the sales momentum, too, is better. Karvy Stock Broking’s Parikshit Kandpal, has analysed the asset portfolio of real estate players and believes the bulk of the office/retail assets have become commercially operational during FY13-14. “With capex peaking out being supported by a more conducive interest rate cycle, reflation shall help ease pressure on the parent’s balance sheet. Likely beneficiaries include DLF, Oberoi, Phoenix Mills and Prestige Estates,” he explains.
Over the years, real estate players have learnt their lesson from past mistakes and are delivering projects on time. Also, the scale of most listed companies has improved over the years, even if at the cost of higher debt. Kotak Institutional Equities says 50 per cent of the 10 companies evaluated have improved their debt servicing, while for 30 per cent of the companies, debt has peaked at current level of operations and will decrease over FY15. The brokerage believes increasing debt for growing operations is healthy, provided operational cash flows remain positive (developers utilise pre-sales collections for expansion).
Analysts also say the companies are now utilising cash to de-leverage and acquire more projects in newer markets. This helps companies diversify and spread risk, as real estate is mostly a regional play. According to Kotak Institutional Equities, increasing debt for growing operations is healthy, provided operational cash flows remain positive (developers utilise pre-sales collections for expansion). Also, developers constructing build-and-lease properties will use debt as yield spread is high (usually).”
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