Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
By when is Indian real estate sector expected to recover? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 30, 2011

    By when is Indian real estate sector expected to recover?

    That the Indian real estate sector has seen some of the worst cases of wealth destruction is well accepted. In our previous article in this series we also discussed some of the factors that had led to the realty bubble. High property prices made buying a property unaffordable for Indian middle class and genuine home buyers. This led to a slowdown in demand for real estate. Developers who had made abnormal profits during the boom period saw volumes dropping.

    The double whammy of plunging sales and rising costs (both operating expenses and interest costs) have taken their toll on the profitability of real estate majors. Also, banks turned cautious towards rescheduling debt or issuing fresh loans to real estate companies, as an aftermath of the bribe-for-loan scam. Few realty companies had raised funds from Non Banking Financial Companies (NBFCs) at interest rates as high as 16% to 20% and ended up defaulting on the same. Heavy debt burdens also put a lot of liquidity pressures on the smaller entities.

    So what are the possible scenarios from here?

    The prospects of recovery of the sector for investors remain bleak until the problem of poor financials of real estate majors resolves.

    • Affordability is the key: Affordability is the most important factor when it comes to real estate prices. Of course there is a huge demand for housing in India but people can only buy what they can afford. The current high prices-high interest rates scenario has started denting the home affordability of prospective buyers.

      • Decline in interest rates: Looking at current inflation numbers, RBI seems to be in no mood to reduce interest rates in the near term. At best, it might keep the rates stable. A significant decline in interest rates is only possible if we see a considerably slower growth in the economy. However, if that happens, slower economic growth will also reflect on the income levels and job confidence. This will impact the demand for real estate.

      • Drop in real estate prices: Reducing property prices will likely serve dual purpose for developers. It will help them clear inventory and will also increase their cash flows helping them get rid of debt and interest expense which is eating up their profits. Though the move may affect their margins in the near term, it should help them in the long run with a cleaner balance sheet. However, real estate companies are reluctant to do so and currently adopting a wait-and-watch policy with regard to price reductions.

    • Economic recovery: Economic recovery both in Indian and globally will boost the confidence of both home buyers as well investors in real estate. While this may seem an ideal scenario, it is dependent on macro-economic environment, which is currently shaky and may take time to recover.
    The wait and watch approach may have worked for the realty companies until a year back, when global economy was as shaky and several PE funds had invested in the sector. However, the economic scenario today is far more volatile. The sentiments of buyers remain weak and they are holding back on purchases in anticipation of a price correction. In such a scenario, do the realtors have the liberty to keep inventory piling up? In our view, as the companies get weighed under heavy debt and interest costs they will get pressurized to sell and generate cash.

    The key to better prospects for the sector is rational prices. The same can not only improve the financials of the realty companies but also free the sector from the disdain of regulators and investors.



    Equitymaster requests your view! Post a comment on "By when is Indian real estate sector expected to recover?". Click here!

    1 Responses to "By when is Indian real estate sector expected to recover?"


    Sep 18, 2011

    Never ever going to recover in our life time. On an average home prices have gone up by 5 times between 2003 and 2011. In what way it is logical.

    Like (2)
    Equitymaster requests your view! Post a comment on "By when is Indian real estate sector expected to recover?". Click here!

    More Views on News

    Sorry! There are no related views on news for this company/sector.

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 24, 2017 01:08 PM