'Realty' biting the dust

Tue, 23 Feb Pre-Open

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The Indian markets have taken some beating over the past few weeks. After scaling the highs of almost 18,000 in early January, the Sensex has fallen by around 9% till date. Current concerns are more global in nature. With European economies falling apart and the US situation becoming grim, global markets are staring at uncertain times in the short to medium term. And in being largely dependent on foreign inflows, Indian markets are dutifully toeing whatever's happening to global markets.

Amidst all this, there is one sector in India that is underpinned by domestic concerns of demand and supply. We are talking about real estate. Despite being at the forefront of benefiting from the government's stimulus measures, Indian realty companies still face an uncertain future. Lack of substantial demand to take care of the large supply of expensive residential and commercial properties seem to be their biggest worries these days.

One big reason the demand has not really seen a revival for realty companies is the RBI's diktat to banks to assign higher risk-weight to their real estate lendings. The RBI had cracked the whip on loans to these companies in October 2009 when it mandated higher provisioning requirement for advances to the commercial real estate sector.

And then it's the matter of persistently high prices that has scared buyers away from the market. Some blame this on the nexus between builders and brokers, who have been hoarding properties to push up their prices. And not just the RBI, other industry experts like Deepak Parekh of HDFC have also come down heavily against this behavior of real estate companies and their cohorts.

You see, Mr. Parekh is no outsider to the grave pricing issues faced by property buyers in India. In fact, he has been very vocal in the past about the greedy nature of realty companies. Whether it is the issue of overpricing, or the misnomer of 'super-built up' area as against the simple concept of 'carpet area', he has been against it all.

So overall, the real estate story is currently being characterised by high pricing and subsequently lacklustre demand. And then, what with the RBI looking to raise interest rates to counter the rising inflation, and realty companies see another devil round the corner.

The impact of all this is being seen on real estate stock prices. The BSE-Realty index has for instance dropped by almost 35% from its highs touched in October 2009. Apart from the fundamental issues as mentioned above, investors in realty stocks now have to contend with a slew of realty IPOs that are about to hit the market. These will lead to another kind of oversupply for realty companies – oversupply of too many realty stocks looking for less number of investors!

Overall, we maintain our belief that quality and affordable homes are still out of reach of average buyers in most Indian cities. And if greedy real estate companies, instead of getting punished for their misdemeanors, continue to get rescued by banks, they will not change their stripes in a hurry and will continue to bid up home prices.