Bengaluru & Mumbai realty markets show slow improvement

One look at the rally in the BSE Realty index and one would believe that the sector is doing very well indeed. Since April, it has returned around 30%, outperforming the benchmark BSE Sensex.

Certainly, the sector’s woes have receded, although they are far from over. A June quarter earnings review shows some positive signs. The key is reducing inventory levels, which had soared to 18-24 month levels in some cases in the residential property market. This came about with a slowdown in new launches by developers, mainly in urban property markets. Meanwhile, commercial leasing activity, the bright spot in the sector, has been steadily rising in the past four quarters, supported by an expansion in the services sector.

Although residential property sales have picked up in some regions, pan-India traction remains a distant cry. So, while the Mumbai and Bengaluru markets are showing slow sales improvement, the National Capital Region (NCR) is reeling under over-capacity. Firms such as DLF Ltd, with a high exposure to this market, will be weighed down by the burden of unsold projects for some more quarters.

This explains why mid-sized firms such as Oberoi Realty Ltd, Godrej Properties and Sobha Ltd, which have a balanced exposure to residential, commercial and hospitality sectors, have weathered the downturn. What’s more, they have fewer legacy projects and less of a debt burden. That said, June quarter sales were not up to expectations across the residential real estate market. So, the recent rally in realty stocks is in response to positive developments on the macroeconomic front.

One, the 7th pay commission recommendations of higher salary and pensions for government staff and retirees may trigger demand for mid-segment housing.

Two, developers are selling non-core assets and monetizing land parcels to trim debt.

Three, the regulatory changes to open the sector to investments is leading to private equity interest in realty projects, which could ease balance sheet pressure for developers.

That said, it is safe to await a consistent increase in property sales before rushing in to invest in realty firms.

Author: Vatsala Kamat

Credits Live Mint

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