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Realty ready to roar again

By Raghavendra Kamath and Gautam Chakravorthy in Mumbai
May 25, 2009 10:29 IST
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Investors and analysts have begun re-rating the realty sector on the optimism that the worst may be over, as the efforts of recent months and a stable global environment will help developers attract funds and boost earnings.

Developers in the past year have restructured debt, sold non-core assets and tweaked the product mix, helping push up sales. This has encouraged investors to buy stocks of real estate companies and motivate analysts to revise price targets and upgrade the outlook on the sector.

"The stabilisation in the international market improved financials arising out of restructuring of loans and enhanced liquidity from banks have resulted in revision in the outlook for the sector," said Dipesh Sohani, an analyst with MF Global, an equity brokerage. "The real estate players are better placed now than what they were two-three quarters before."

Reflecting the positive sentiment, the Bombay Stock Exchange Realty Index rose 58 per cent in the past month, outpacing the benchmark Sensitive index's gain of 27 per cent. Stocks of Unitech, DLF, Indiabulls Real Estate and HDIL have jumped 65 per cent, 41 per cent , 54 per cent and 146 per cent, respectively.

The turning point seems to have been Unitech's successful qualified institutional placement on April 16, at a time when very few companies dared to enter the market. The country's second-biggest developer raised Rs 1,625 crore (Rs 16.25 billion) from the sale at Rs 38.50 apiece. The stock is now trading at Rs 71.25 on the Bombay Stock Exchange.

The renewed faith of overseas investors stems from the series of steps taken by developers to improve their financial position.

Unitech has cut debt by Rs 2,000 crore (Rs 20 billion) while DLF, the country's biggest developer, has repaid Rs 1,700 crore (Rs 17 billion) of loans in the past year. The two companies together have also restructured as much as Rs 4,100 crore (Rs 41 billion) worth of loans with commercial banks and mutual funds, avoiding short-term payment pressures.

Even commercial banks, which were hesitant to lend to developers, appear to be loosening a bit. According to Reserve Bank of India data, loans to real estate companies grew 61.4 per cent for the 11-month period ending February 2009, as compared to 26.7 per cent growth in the corresponding period last fiscal.

Home loan disbursements by the country's top lenders, which signal the actual demand for homes, is also improving. HDFC, the country's largest home loan lender, saw its disbursals going up by 17.5 per cent in the fourth quarter of FY09, at Rs 12,400 crore (Rs 124 billion). LIC Housing saw an increase of 42 per cent and 22 per cent in March and Q4 numbers.

"Liquidity has improved and their balance sheets are looking much better now," said Shailesh Kanani, an analyst with stock brokerage, Angel Broking. "They were able to raise money during the current market conditions at lower valuations, which they were unwilling to do earlier."

A general softening of interest rates has also helped developers to cut their borrowing costs by as much as 300 basis points. Some of the developers' average borrowing cost had risen to an astronomical 17 per cent.

"Significant loan restructuring and softening of interest rates have strengthened the balance sheet of real estate companies," said S Subramanian, head of Investment Banking at Enam Securities.

Developers have also tweaked their product mix to improve cash flows. A global economic slowdown had halted sale of homes, offices and shops in the past year, creating a severe liquidity crunch for developers, who had relied on excessive debt to expand operations.

"Real estate is nothing else but managing cash flows," explains Sohani. The exuberant demand for real estate in the bull-run had swayed developers into offering expensive products, for which there was no demand as the economy contracted.

To rectify the situation, developers have cut prices by as much as 40 per cent in key markets and also launched a series of residential projects, which were in the so-called affordable category. The change in strategy had a suitable impact.

DLF, which launched its new housing project in Gurgaon/Noida, sold out almost 85 per cent of its residential units on offer in the first two days of sale. Unitech has sold out almost 2,100 homes in the past two months.

Overseas investors watched these developments with keen interest and lapped up stocks of realtors when they entered the market to raise funds.

After the success of Unitech's QIP issue, which was subscribed more than two times, DLF increased shares it had put up for sale by 68 per cent after it got a strong response from institutional investors. Similarly, Indiabulls Real Estate's $553 million QIP issues was subscribed by only three overseas funds, including HSBC, Texas Pacific Group and Fidelity.

Analysts are now becoming more bullish. Many of them have begun re-rating the stocks of real estate companies which have cut debt and infused liquidity in the company either through asset sales or share sales to investors.

International brokerage Credit Suisse has changed its rating on Unitech to 'outperform' from 'underperform,' with a revised price target of Rs 80, compared to Rs 26 earlier. Another brokerage, Alchemy, has also revised the price target of Unitech to Rs 80 from Rs 25 it set in December last year.

"Stocks were beaten down sharply due to negative sentiments in the market due to fall in realty prices and volumes. Now when momentum is up, I am not surprised if the stocks were revalued by two and two-and-half times," said Ramashraya Yadav, head of strategy at Mumbai-based Orbit Corporation.

Analysts are now watching the new year with optimism. "Unlike in the past year, survival of developers is no longer an issue in the immediate future. The focus has now shifted to earnings growth,'' Sohani said.

Adding to the positive sentiment was the return of the Congress-led United Progressive Alliance to power, which meant greater stability at the Centre and positive long-term policy measures.

"A stable government at the centre with a decisive mandate would encourage more FDI/FII/ domestic investments in real estate. Continuation of policy measures should also lead to increased buyer confidence triggering a recovery in demand in the second half of FY10," international brokerage Credit Suisse said in a recent report.

The stability factor had a partial rub-off on the Indiabulls Real Estate QIP issue. The sale concluded in a day and some existing investors such as Fidelity and HSBC increased their stake in the company.

Taking advantage of the upsurge in the market, some investors such as Fidelity and JP Morgan, who had bought into the sector at higher levels, began partially liquidating their holdings. The FII sold Rs125 crore (Rs 1.25 billion) worth of shares in Indiabulls Real Estate.

But a section of FIIs, who are bullish on the India, warn against the move. "The temptation of investors to sell shares in the rally is a mistake. The dramatic re-rating of the Indian market is set to continue," BNP strategists led by Singapore-based Clive McDonnell wrote in a report.

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Raghavendra Kamath and Gautam Chakravorthy in Mumbai
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