Reality of realty companies

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Investors’ hopes for realty stocks rose dramatically in mid-2014, but things have gradually turned to despair.

BSE’s Realty Index had hit an abyss in January 2014, only to surge in the middle of the year, with hopes of a smart revival in realty fortunes, thanks to the change in government. Unfortunately, reality has turned out to be multiple storeys away from expectations.

For perspective, the performance of the sector in the June quarter shows that realty firms in the listed universe are struggling. While new launches were deferred or delayed for want of approvals, existing residential property inventory is still high among pan-India real estate firms. Property prices across metros and big cities are range-bound, thanks to a large drop in sales compared with a year ago. In the case of DLF Ltd, for instance, sales stood at 0.16 million sq. ft during the June quarter, nearly 60% lower compared with sales of 0.38 million sq. ft a year ago.
Regional firms Lodha Developers Ltd, Sobha Developers Ltd and even Godrej Properties Ltd posted a better performance, on limited new launches.

However, given the subdued appetite and weak revenue growth, operating performance hardly brought any cheer, in spite of firms trying to trim costs. The average net profit of the 13 firms listed under the BSE realty index contracted by nearly 46% year-on-year. The fact remains that firms are battling high inventory in the residential segment. Besides, they are grappling with high working capital demands and an increasing debt burden. The interest coverage ratio (operating profit/interest) has declined for the sector, indicating a weakening in the ability to service interest costs.

According to property consultant Knight Frank, there is an inventory of 700,000 houses in India’s top eight cities. And, if firms are unable to dispose it of in 2016, there could be more turmoil in the sector.

Further, the real estate sector gains momentum in the last leg of any economic revival, which means there’s some time to go before the current pain eases.

For the near term, hopes are pegged on commercial property leasing that has picked up in select cities. But then, few firms are present in this segment among listed companies.

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