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Green shoots in realty sector? - Views on News from Equitymaster
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  • Aug 7, 2009

    Green shoots in realty sector?

    Financial year 2009 was one of the toughest years till date for the real estate sector in India. This was quite evident during the latter half of the fiscal when companies were facing pressures from all sides. Demand was hampered due to the overall slowdown in the economy, which led to pricing pressures. Customers had deferred their plans to purchase homes in anticipation of further price drops. Further, banks were also skeptical of disbursing home loans, which had already declined substantially on account of high interest rates. In addition, real estate companies themselves faced liquidity issues due to which they resorted to loans at high interest rates and worsened their already highly leveraged balance sheets.

    However, looking at the performance of the real estate developers in the recent months, the scenario certainly seems to have taken a turn for the better. As per a leading business daily, sales of major real estate developers have grown more than 3 times in the latest quarter when compared on a sequential basis. The general consensus is that the trend is likely to continue. At least that is what the companies themselves believe.

    To put things in perspective, DLF, India's largest real estate developer sold nearly 2,500 apartments during 1QFY10 as compared to about 600 in 4QFY09. In the quarter ending December 2008, the company had sold only 120 apartments.

    India's second largest developer, Unitech, witnessed a similar trend. The company sold nearly 5,000 units during the quarter ending June 2009. This number is quite astonishing keeping in mind that it sold only 300 to 400 apartments in the preceding quarter.

    The real estate industry as a whole is quite optimistic about the future. As per a leading business daily, developers have lined up nearly 60 m square feet of new launches this year. This is more than double of last fiscal's bookings put together. Since the annuity business, i.e. leasing, of these players has been relatively slower, they have been focusing on the residential sector, especially the mid-income housing. However, considering that the overall economic scenario has not yet stabilised, it would make sense for the realty players to launch projects cautiously. Most real estate companies do not seem to be doing so.

    "China builds, dismantles and rebuilds again"
    "Some of our GDP data sure looks rosy. But they do not amount to growth of social wealth; in fact, social resources are being wasted to show GDP growth." These are the words of an official in China as reported by a leading business daily. According to him, the Chinese government builds bridges, then dismantles it and then rebuilds it, each time contributing to GDP. It may be noted that there have long been suspicions that the Chinese GDP data was being massaged and exaggerated by regional party leaders to show higher economic growth. In fact, Marc Faber, a leading economist, has recently said that China's economy is growing at 2% and not 7.8% as its government claims.



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