The Hindu Business Line : Flagging demand, mounting debt dent realty numbers

The real estate sector’s woes came to a head in the December quarter. The 22 listed realty players actively traded in the market reported a 59 per cent decline in sales and 69 per cent fall in profits for the quarter ended December 2008 (consolidated numbers taken wherever applicable) over a year ago.

Flagging demand as well as lower realisations contributed to the poor showing. Both large and small developers were afflicted with a sharp decline in volumes sold, fewer launches and mounting debt, resulting in stretched balance sheets.

The numbers

While profits of real estate companies have been under pressure from the beginning of this fiscal, revenues declined sharply for the first time in the December quarter. These companies had recorded a 45 per cent sales growth in the September quarter. In December, all companies barring Indiabulls Real Estate and Peninsula Land, recorded a fall in revenues. The latter witnessed sharp increase, perhaps on a low base in 2007, when its revenues were insignificant. Small players such as Lok Housing, Prajay Engineers Syndicate and IVR Prime Urban were among the worst hit with revenue declines of about 90 per cent.

On the net profit front, apart from the above-mentioned companies, developers such as Parsvnath Developers and Ansal Properties too bore the brunt on the back of a good number of projects not reaching the revenue booking stage.

The decline in revenues magnified the pressure on profit margins, with operating profit margins falling to 40 per cent from 55 per cent a year ago. Lower realisations, reduced volume and increase in raw material costs have been the key challenges. Raw material cost as a percentage of sales doubled to 14 per cent, showing that companies are yet to benefit from decline in commodity prices.

Interest cost as a percentage of sales too saw a steep increase from 3 per cent to 10 per cent in December 2008 over a year. However, total interest costs increased by only 5 per cent on a sequential basis. This could be a function of banks becoming more cautious in lending, or projects making little progress in execution.

Volumes dwindle

While the focus in the September quarter was on affordable homes to improve volumes, the demand scenario itself appears to have been in doubt in the latest quarter. Top realty players such as DLF recorded an over 60 per cent drop in sales (million sq ft) booked during the quarter, with the sharpest drop witnessed in the commercial segment. In the residential segment, the weighted average sales price of DLF apartments have declined from Rs 4,628 a sq ft to Rs 2,736 a sq ft over a one-year period.

Mumbai-based developers such as Akruti City and HDIL which thrive on the lucrative Transferable Development Rights (TDRs) business – development rights received from slum rehabilitation projects, too ended with muted performance on the back of lower demand for TDRs.

Funding

Even as most companies struggled to fund their projects and keep their working capital cycle moving, promoters of a few such as Unitech, Peninsula Land and Sobha Developers had to resort to pledging of shares to raise funds. Inability to service these would result in the shares being sold in the market.

However, the biggest respite on the debt front may be the RBI’s decision to allow restructuring of bank loans to the commercial sector till June 2009, without the same being classified as a non-performing asset. While this would protect the balance sheets for some time, the key to reviving cash flows would be a revival in demand over the next few quarters. While declining home loan rates and selective price cuts by developers may entice buyers, the slowdown in the IT sector and threats of job and salary cuts pose a challenge to these incentives.