Why investors need a real(i)ty check

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Vidya Bala

If there is one thing that real estate companies have achieved by getting themselves listed on the bourses, it is to become the favourite whipping boys of the market. Whether it is the global housing meltdown or the local economic crisis or the government's Corporate Debt Restructuring package, or the more recent interest rate hikes by the RBI, realty stocks always seem to be at the receiving end! And now, the recent graft charges on some executives of banks and financial institutions – commonly labelled as the ‘housing scam', is considered a good enough reason to batter the BSE Realty index down by 13.5 per cent in just a week's time. Is the market letting fear over-rule reason? Let's place some facts in perspective before we attempt to answer this.

RESULT OF greed and fear

Between 2005 and 2007, players in the realty sector, no doubt, demanded sky-high valuations showcasing their bountiful land bank to get listed. Markets too accepted this, thanks to lack of familiarity with the sector's performance record and valuation metrics, with only a handful of them already listed.

Come 2008-2009, the downturn proved to be a great leveller and markets pulled down realty valuations to more modest levels. . However, concerns about defaults of loans by real estate companies did their rounds and many utilised the Corporate Restructuring Package to get their act together. Major players such as Unitech and DLF were even reported to be sinking.

While the market rally provided some respite until January 2010, the sector was soon beaten down again on interest rate hikes and fears of liquidity crunch once again.

And now concerns that banks may not lend to the sector after bribes (by a financial services firm) for loans taken by corporates has once again led to beating the sector down with some stocks plunging as much as 40 per cent in a week. .

The reality

Even as the market was right in punishing the much-hyped realty stocks in 2008 and shunning those that have not made much effort in the revival in 2010, the recurring fears of a “crunch” situation in the sector due to interest rate hikes may be overdone if one looks at some facts: One, of the 13 realty companies in the BSE Realty Index, except for Unitech and Sobha Real Estate Developers, the debt equity ratio of the rest stood at about one or even lower in the downturn year ending March 2009. While a good number of them did have issues with interest servicing, the moratorium under CDR provided them a decent time to set the house in order. By March 2010, every one of the realty index companies had brought their debt-equity ratio to a range of 0.3-1.1, considered comfortable in any sector.

Two, it may be reasonable to assume that institutions pour thousands of crores of rupees in a sector only if they do believe that the sector can keep itself afloat. The Rs 12,000 crore QIP inflows in 2009 together with over Rs 6000 crore of private equity and venture capital money in the sector in 2010 were clearly suggestive of the lower concerns if not revival in the sector. This inflow, more significantly deleveraged the balance sheets of those companies that were high on debt. The third fact, which holds relevance in the recent chain of events is that the net credit lent to the real state sector from banks jumped to Rs 9604 crore in this financial year up to September 24, 2010, a five-fold jump compared with similar period a year ago. The jump in recent times comes on the back of the strengthening balance sheets of real estate companies and their slowly reviving sales volumes. The June and September quarter numbers are proof to this. The only hit taken by these companies is on profitability. Margins have declined, as players slashed prices to keep volumes ticking. While these facts cannot justify the acts of bribery committed by banks in lending loans to real state and other corporates, investors may have to dig deeper as to the implication of these instances on the company's fundamentals. This is perhaps not a scam in the true sense of the term nor are its implications, if any, as serious as that of the 2G scam for telecom companies.

Home buyers, if they are alarmed by the recent turn of events have very little reason to panic as this issue currently has no connection whatsoever to ‘home or housing loans'. The investigation deals mainly with the loans extended to corporates and not to individual home buyers. While one may fear that any blocking of funds for realty projects may hurt home buyers, reports so far have it that most of the dealings by realty companies in questions were in 2008 or 2009 and not in recent times.

Real estate companies on the other hand, have very little choice but to improve their disclosures at least on a half-yearly basis. If investors have to appreciate their business or perceive value, developers need to disclose key aspects such as the volume, realisations and funding aspects of their projects on a routine basis. For a complex sector such as real estate disclosure can only be a sign of strength.

Related Stories:
Developers fear scam will lead to freeze on loans
Pranab asks lenders to review exposure to cos under CBI lens
CBI arrests LIC Housing chief, senior bank officials on graft charges
All norms adhered to in clearing loans: LIC Housing

(This article was published in the Business Line print edition dated November 28, 2010)
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