One normally expects the real estate market to correct with a six-month to one-year lag after the equity market.
MUMBAI: One normally expects the real estate market to correct with a six-month to one-year lag after the equity market. But the addition of more than a dozen real estate companies to the listed space in the last two years, may call for a rewriting of the script.
The fall in real estate stocks ever since the equity market correction began in mid-January 2008 has already given a sneak preview to what lies in store for the sector.
While the Sensex has fallen 23.7% since the rout began, the BSE Realty Index, representative of 14 real estate companies, has fallen 42.9%.
“We downgraded our coverage view of the India real estate sector to ‘neutral’ from ‘attractive’ on November 15, 2007, principally on valuation grounds. We believe the sector is witnessing a slowdown and execution plans appear demanding…. We therefore maintain a ‘neutral’ coverage view,” said Goldman Sachs in a February 26, 2008 report. Following its forecast revisions, it has downgraded Unitech to ‘sell’ from ‘neutral’, maintained a ‘buy’ on Ansal Properties and ‘neutral’ on Parsvnath and Mahindra Lifespace.
Many brokerages have a negative view on the sector, but a closer look reveals there are few bold enough to advise a ‘sell’ on specific stocks.
Director of real estate advisory firm DTZ India, Ambar Maheshwari did not mince words on his stock views: “My view on real estate stocks as a whole is negative,” he says.
“All the real estate players raised money in the market on land bank valuations. To my mind, even at that time, these valuations were very high. Now, though demand is high, the oversupply in both commercial and residential spaces, will only put pressure on prices, and hence stocks,” he added.
A research report written as late as Monday by Deutsche Bank, also paints a gloomy picture for real estate. “Most indicators reflect oversupply of real estate in the near term and possibly the medium term.”
Its analysis says that the momentum for hoarding land is unwarranted, given that land banks are disproportionately large when compared to developers’ execution capability. “Aggregation seems to be primarily driven by market cap considerations… most stocks have become expensive on a PE-based valuation,” says the report. PE refers to the price to earnings multiple, a yardstick used to measure the expensiveness of a stock.
Other reasons that Deutsche Bank attributes to the real estate slump are that demand from IT ITES (~80% of demand for office space and ~40% of residential space) over the next 5-6 years will significantly lag the cumulative supply proposed by developers; the number of Income Tax assessees is still small, suggesting the emergence of the Indian middle class might not be as strong as it seems.
Another reason is a sharp rise in property prices has cooled demand, as shown by a decline in property registrations in a few major cities and a sharp drop in the shift from bank outstandings to mortgages.
“Without an expectation of interest rates declining and the hazy outlook for ITITES sectors, demand will remain weak in the near term and with supply continuing to ramp up, oversupply in select markets could spread,” it adds.
While Deutsche and Goldman are negative on the sector, brokerage house CLSA may give optimists some reason to cheer. A report from the broking firm seems especially optimistic about returns that mid-cap stocks in the real estate sector can generate. Its report dated February 19 says: “Property mid caps have corrected by 30% over the past month and stocks now trade way below the norm at 35-50% discounts to net asset value. This reflects investor pessimism and expectations of a property-price correction, but a sharp drop is unlikely given strong underlying demand at a pricing point 8-10% lower than prevailing market prices.”
Now that property stocks have corrected further, and the universal agenda being to buy low and sell high, CLSA might be just be more optimistic now! It had rated Housing Development & Infrastructure and Sobha Developers as ‘buys’, and Parsvnath Developers and Puravankara Projects as ‘outperformers’.
Goldman Sachs
Unitech: sell
Ansal Properties: buy
Parsvnath Developers: neutral
Mahindra Lifespace: neutral
Deutsche Bank
DLF: buy
CLSA
Housing Development & Infrastructure: buy
Sobha Developers: buy
Parsvnath Developers: outperformer
Puravankara Projects: outperformer
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