Real estate stocks: Hardly affordable

Real estate stocks: Hardly affordable
Business Standard, Money & Markets, Section II, Page 1

Shobhana Subramanian / Mumbai

The reality on the ground doesn’t seem to be in keeping with the sharp run-up in stock prices.

Crisil says capital values for residential real estate could fall another 8-10 per cent in 2009 before stabilising next year. This is somewhat in contrast to what developers have been indicating about property prices. In a study on the real estate market, Crisil says that even investors, looking for capital appreciation, are likely to remain cautious until prices stabilise. Another key point that Crisil makes is that the so-called ‘affordable housing’ that developers are talking about are unlikely to get a strong response. That’s because many of these projects are coming up on the outskirts of cities, very distant from the business districts, and in locations where there are few amentities.

Affordable properties, it points out, are those that come up within city limits and are within the reach of 60 per cent of the population in that area, so that there is a meaningful demand. As for commercial property, Crisil expects lease rentals to fall even next year on the back of a 30-40 per cent fall from the peaks that they hit sometime in the first half of 2008. The news is not much better for the retail segment, where Crisil expects a 16-18 per cent fall in rentals this year and some fall next year too. IDFC SSKI points out that genuine buyers are returning to the market only in the residential segment.

Given this backdrop, the doubling of real estate stock prices in the past three months seems out of place. It is true that many property firms have been bailed out by banks with their loans having been restructured and a couple of them have managed to pick up equity money through placements.

However, at the end of the day, they need to be able to sell properties to generate cash flows. Of course, companies are attempting to stimulate demand by bringing down prices, but that means they need to sell larger volumes because the rate per sq ft is now down at least 30 per cent from peak levels. That doesn’t seem to be happening — even for bigger companies, the gap between the number of apartments sold and those actually delivered is large.

Also, while offering construction-linked payment plans as opposed to time-linked plans is fine, it only results in cash flows becoming back-ended.