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India’s property-stock boom may end on loan curbs, analysts caution

India’s property-stock boom may end on loan curbs, analysts caution
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First Published: Fri, Feb 09 2007. 10 43 PM IST
Updated: Fri, Feb 09 2007. 10 43 PM IST
Mumbai: Real estate-related stocks last year accounted for six of the top 10 performers in the BSE-500 index, the broadest measure of India’s stock market. Three of the six are down this year and just one is among the top 10.
Three—Mahindra Gesco Developers Ltd, Parsvnath Developers Ltd and Peninsula Land Ltd—are among the 10 worst.
Shares of Unitech Ltd, India’s largest real-estate developer by market value, soared 26,869% during the past three years. Anant Raj Industries Ltd, a competitor, leapt 39,548%.
Both have dropped at least 5% from peaks in November and December and further losses may lie ahead.
The highest interest rates in four years, tighter lending requirements and seven share sales this year are hurting real-estate stocks.
Those companies had rallied as a property boom pushed apartment prices in southern Mumbai to near-Manhattan levels.
“Property-stock valuations are approaching bubble territory,” Parameswara Krishnan, who manages $150 million at DNB Nor Asset Management in Chennai, said.
“We should see some correction.” He said he is avoiding real-estate shares.
Mahindra Gesco, among the first to set up an industrial park in South India, has fallen 22% in 2007. The shares had surged 121% last year. Parsvnath Developers is down 21% after jumping 163% in 2006. Peninsula Land, which has developed commercial properties for US companies such as MetLife Inc., dropped 19% this year after rising 127% last year.
Unitech dropped 13%from its 23 November peak, while Anant Raj lost 5% since its 12 December high. The shares are down 0.2% and 0.3 %, respectively.
Indian developers are among the BSE index’s most expensive members on a price-to-earnings basis.
Unitech trades at 31 times expected earnings, while Anant Raj, a New Delhi-based developer in which billionaire George Soros bought a stake last year, at 67 times. That compares with 21 times for the BSE-500 and 19 times for the eight stocks in Bloomberg’s Asia-Pacific Home Builders Index.
Average home prices tripled over the past three years, buoyed by the world’s second-quickest growth rate among major economies after China. Prices rose 50% to 100% over the past year in cities such as Delhi, Bangalore and Hyderabad, property consultant CB Richard Ellis said in a report for the quarter ended December.
A six-bedroom duplex apartment in the Malabar Hill area in South Mumbai, where Bollywood actor Vinod Khanna and Citigroup Inc.’s India head Sanjay Nayar reside, sold for about Rs25 lakh ($5.7 million), according to the buyer, Rakesh Jhunjhunwala.
A comparable apartment on the Upper East Side of Manhattan would cost between $6.5 million and $8 million, said Jonathan Miller, president of Miller Samuel Inc., a real-estate appraisal firm in New York.
Demand for office space is expanding in downtown Mumbai and in other cities in India as banks such as Lehman Brothers and Credit Suisse set up shop in the country. They join other tech companies as International Business Machines Corp. and Dell Inc.
Mumbai’s office rentals are now the third highest in the Asia-Pacific region after Hong Kong and Tokyo, a survey by property adviser DTZ Debenham Tie Leung Ltd. showed. It costs annually $88.2 per square foot to rent office space in Mumbai, compared with Tokyo’s $97 and Hong Kong’s $141.
The central bank is moving to cool the market. On 31 January, RBI raised its overnight lending rate for the fifth time in a year to 7.5% and asked lenders to double provisions for commercial real-estate loans to 2% in an attempt to curb defaults.
“The continued high credit growth in the real estate sector, is a matter of concern,” the central bank said.
Colliers International India Property Services says average property prices across the nation may drop as much as 20 percent over the next two years as more homes are built.
Still, demand for homes and offices mean any drop in property stocks will probably be a correction and not a rout.
“While a decline in housing affordability and potential oversupply could weaken prices in the near term, the long term outlook remains attractive on strong demand,” analyst Mahesh Nandurkar at CLSA Asia Pacific Markets wrote in a Jan. 25 note.
Initial share sales, though, will be competing with listed real-estate companies for investor funds.
Seven companies have sought regulatory approval for IPOs so far this year, up from just two last year.
“As more supply of paper hits the market, valuations and returns will come down to more stable levels,” said Krishnan, at DNB Nor Asset Management in Chennai.
“Companies may not be able to get the pricing they want,”he warned.
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First Published: Fri, Feb 09 2007. 10 43 PM IST
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