Reality check on Sensex and India’s realty industry (Comment)

After the trough of 8,160 points, the recent turnaround in Indian stock markets that has lifted the 30-share sensitive index (Sensex) of the Bombay Stock Exchange (BSE) past the magical 20,000-point mark may cheer up India Inc - but it has certainly not lifted the spirits of the real estate market.

What’s significant to note is that many real estate companies made fortunes during the earlier bull run of 2006-08. But the present run has bypassed these companies. This is clearly established by the BSE’s realty index which registered a double-digit increase during the previous rise but has dived over 4 percent this year.

Despite the buoyancy in stock markets and the overall economic growth, the real estate sector is unable to match the pace of upturn. Stocks of the many companies that made their debut public issue during the previous boom time are trading below their offer price today. In some cases, there’s an erosion of as much as 40-50 percent, while in some others, the peak stock prices have crashed up to 300 percent.

So much so that even the wealth of real estate barons has been considerably eroded. The wealth of K.P. Singh, the chief of India’s number one real estate company DLF, has gone down from around $30 billion to a little over $10m billion between October 2007 and now - a fall of over nearly 65 percent.

Similarly, the personal wealth of Ramesh Chandra, the promoter of the country’s second largest real estate firm Unitech, has plummeted from nearly $10 billion to a little under $2.25 billion during this period - a fall of over 77 percent.

The scenario is not favourable for a number of real estate public offers in the pipeline forcing the dozen-odd realty companies to defer their offers despite getting regulatory approvals, while the fate of another half-a-dozen players awaiting final nod is no less uncertain.

If these initial public offerings, meant largely for clearing past high-cost debt and to fund purchase of land, fail to materialise, it will spell more trouble for these realty players that are struggling to cope with serious debt problems.

Despite some revival, cash flows of developers have also not yet stabilised. And to make matters worse, banks are cautious in either giving new loans, or restructuring the old ones, due to mounting bad debt. As a result, developers are going for the high cost non-banking funding options to meet their capital requirements.

Amid these funding woes, the developers are further hit by drop in demand due to rising property and mortgage prices. While the maximum demand of 85-90 percent is for the mid-to-affordable housing, this latent demand has also been adversely hit by sharp increase in home prices in the last six months.

A findings of a survey by leading financial services firm HDFC Securities already shows that the realtors have pressed the panic button. Its survey report states that a sharp increase in property prices is adversely impacting the absorption of over 260 million sq ft of residential property in key metros. So much so that analysts are also questioning the sustainability of the real estate market amid investor-driven sales and over-supply in some pockets.

Are we heading for a double-dip situation in the realty industry? There is a real danger of it considering that all the ills which are currently plauging the sector are the ones responsible for the slowdown in 2008-09. Real estate analysts are cautioning against the possibility of a property bubble developing by the middle of next.

Analysts also maintain that the national capital and cities and townships around it, where the residential property prices are ruling way above their 2008 peak levels, are specially vulnerable. And it is these largely investor-driven markets that had led the the recent real estate slowdown.

Surely, it is time for a reality check on the realty sector, especially as home buyers are taking a cautious stance and experts are openly questioning the sustainability of unrealistically high home prices. To sustain the newly-generated demand for residential

property, the market needs to undergo price correction, expected in a couple of months.

Real estate players also have to put their house in order, lest they fritter away the gains of this nascent realty revival and head for another round of recession. Clearly, end-users and long-term investors hold the key to sustain the market.

(7.10.2010- Vinod Behl is editor of Realty Plus magazine. He can be reached at vbehl2008@gmail.com)