While there are visible signs of a recovery in the real estate market, price hikes by developers and any increase in interest rates could halt this momentum.
The realty sector, which was the worst affected by the downturn last year, seems to be exhibiting early signs of a recovery. Price cuts on projects over the last six months and healthy pre-sales during the festive season seems to suggest that demand, which had all but disappeared in the third and fourth quarter of 2008-09, seems to be trickling back. Developers are tweaking their business model by launching smaller apartment sizes and playing the volume game to keep prices low and create buyer interest. What has helped matters, believes Ramnath S, director, Research, IDFC-SSKI, are factors such as job security and affordability, which are gradually improving, and a lot of companies likely to revise salaries upwards as against a freeze last year. The benign interest rate environment has also helped. Ramnath believes that pay commission hikes will also increase disposable income of government employees.
...leading to higher prices
Market's liking it too
The research firm believes that while demand from domestic corporates has started to firm up, IT/ITES demand is likely to remain subdued. We review the operations of the largest players by market capitalisation in the sector.
DLF: Attractive price points and a revival in the fortunes of the sector have helped India's largest realty player lure buyers for its residential properties. The company is likely to maintain its mid-income housing focus which has yielded good results in Delhi where it was able to sell 1,400 units (2 mnsqft) and 1,250 units (1.8 mnsqft) at the Delhi Capital Greens project (phase I and II, respectively) and 0.5 mnsqft in Bangalore over the last six months. Including the above, the company has launched about a third of the proposed 15-16 mnsqft residential projects for the fiscal. The story is not as rosy on the commercial and leasing segments. While the company sold over a 1 mnsqft of commercial and office space in the first quarter and demand seems to be improving, the fortunes of this space is likely to see a significant upswing only next year. Its leasing business, too, is going through a similar business cycle.
While things are looking up, the slow and gradual pick up in volumes will continue to be a drag on its revenues. Analysts estimate that its September quarter revenues will be down by half y-o-y. Ebidta margins are likely to shrink 900-1,000 bps to about 50 per cent as the company realigns its focus towards affordable housing segment (below Rs 30 lakh per unit). The company plans to exit non-core business (wind power, SEZs) and land bank to raise Rs 5,500 crore in 2009-10. This will help it to improve its cash position, manage debt repayments of Rs 1,165 crore and increase pace of execution. Though the stock trades at a discount to its NAV, a fall of 10-15 per cent in its share price would make it attractive from a long term perspective.
Indiabulls Real Estate: Indiabulls Real Estate (IBREL) has been able to lease out 0.7 mnsqft of space at the One Indiabulls Centre (Mumbai) at Rs 175 sqft per month. Considering that this is higher than the earlier rates of Rs 150 per square feet, both at the Jupiter and Elphinstone Mills, and future negotiations are likely to be at the new rate, it should boost cash flow of its Singapore-listed subsidiary Indiabulls Properties Investment Trust, which undertakes the leasing operations. A rights issue by IPIT to the tune of Rs 600 crore should also help reduce a part of its Rs 636 crore debt. On the residential sales front, IBREL sold all the units (0.53 mnsqft) of the first phase of its Sky project in Mumbai and has also launched three residential projects next to its One Centre. While the company launched about 9 mnsqft in 2008-09, it is planning to launch about 10 mnsqft in 2009-10, of which 5 mnsqft has already been launched. The company has also been the highest bidder at Rs 1,376 crore for the Mantralaya development project in Mumbai, which could add 1.5 mnsqft to its land bank and about Rs 29 to its NAV. The Rs 1,500 crore IPO of IBREL's subsidiary, Indiabulls Power, should help it to fund the capital requirements of power projects in Maharashtra.
While the cash flow from the proposed rights issue of IPIT, IPO of its power subsidiary and the QIP (Rs 2,650 crore) of IBREL should help matters, growth in its various businesses will depend on the pace of execution. In realty, while thus far the construction work at its NCR and Chennai work is going on, other properties are facing delays according to an ICICI Securities report. While cash is not an issue for IBREL (it has Rs 3,000 crore worth Rs 75 per share), any delay in execution of it's residential, SEZs (not yet notified) or power projects could be costly. Analysts peg the sum of parts valuations (power and real estate) between Rs 335-355 indicating that returns of about 21 per cent from the current prices.
Unitech: Unitech has had positive newsflow recently with the government approving Telenor's (a partner in telecom venture) proposal to hike the stake in Unitech Wireless to 74 per cent. The company has had a good first seven months (March to September) going by the response to its launches aggregating to 21.30 mnsqft of residential and commercial property. The company has managed to book sales Rs 4,000 crore from the sale of 10.11 mnsqft. It plans to launch about 30 mnsqft and achieve about 20 mnsqft of pre-sales in this fiscal, says an analyst. Of the past projects which total an area of 22.31 mnsqft, the company has delivered about a fifth and expects to complete delivery of the rest by March 2011. Improved cash flow from the sale of hotels and plots (Rs 940 crore), two QIPs (Rs 4,400 crore) and Rs 386 crore from Unitech Wireless have helped bring down debt levels to about 0.6 times from 1.7 times last year.
Like DLF, the company is eyeing the affordable housing segment and has launched projects under the Unihomes brand catering to budgets between Rs 10-30 lakh range. After the sale of about 900 units at its Unihomes project in Noida, the company is planning to launch more apartments under this brand. Analysts estimate that the company is likely to have a strong second quarter on the back of higher project and asset sales. Considering the recent spurt in sales at its new launches and balance sheet deleveraging is already factored into the current price and it is trading at a premium to its NAV, expect little upside to flow through in the current fiscal.
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