The Hindu Business Line : Realty stocks: No respite from bear hammering

Mumbai, July 16 Even when the worst seems to be over for the stock markets, there may be more trouble lying ahead for the real estate sector, as it is showing signs of a slowdown.

While the BSE Sensex was down only by 0.79 per cent on Wednesday, the BSE-Realty lost 6.31 per cent – the biggest loser among sectoral indices.

Exorbitant prices

Infrastructure stocks have under preformed the Sensex owing to the exorbitant commodity prices. Increasing steel price, which is a major component in construction work, and rising interest rates have resulted in contraction of margins for most of the companies, says a research report by Angel Broking Ltd.

While the Sensex has registered negative returns of around 20 per cent, since the beginning of the financial year, the BSE-Realty has fallen by around 44 per cent. “There is a slowdown happening in the sector and this is linked to high interest rates, which are pushing up the cost of borrowing and as a result the residential demand is slackening,” said Mr Suman Memani, Research Analyst, Religare Securities.

On the other hand, with construction costs going up by 25-30 per cent in the past 3-4 months, the builders are feeling the pinch, as their inventory levels are rising due to lack of buyers at such high prices, he adds.

De-rating

Since the start of the bull-run in May 2003 and till the sharp correction in May-June 2006, all infrastructure stocks had outperformed the Sensex by a huge margin; however, now it seems that there has been a de-rating in these stocks, said the Angel Broking report.

Most realty stocks have recorded their 52-week low this month from their January highs.

DLF, a realty major, was down by almost 20 per cent in a month. The company had offered to buyback its shares last week, in a bid to shore up its prices.

Among other stocks, Unitech is down by 30.66 per cent over the last month, Indiabulls Real Estate (34.10 per cent), HDIL (33.16 per cent), Anant Raj (30.16 per cent), Akruti City (22.11 per cent) and Phoenix Mill lost 56.18 per cent during the same time period.

A number of medium-sized and small real estate developers could face a liquidity crunch in the months ahead, a recent report by Crisil points out.

Demand slowdown

According to the report many developers have stretched themselves operationally, and borrowed heavily, to benefit from the real estate upturn in the past three years.

The current slowdown in demand for realty, coupled with declining internal accruals and reduced funding options, exposes them to the downside.

A combination of sluggish sales and rising costs is expected to adversely affect the profitability and cash accruals of real estate companies in the near to medium term, the report mentions.

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