The recovery in the real estate market will continue at a gradual pace for a few more quarters before it translates into more robust growth in revenues and profits.
The past six months have seen a recovery in the sector, as prices recovered and buyers started coming back. Analysts are convinced that the market has bottomed out and that prices will steadily improve. But changes in the product mix to more affordable homes and stricter funding norms may lead to some bumps on the road to recovery.
Property developers have priced their new projects attractively, leading to good bookings. Some of them— DLF Ltd, Purvankara Projects Ltd, Unitech Ltd and Lodha Developers Ltd—have also raised residential property prices after the initial launch period by around 5-15% in some areas.
This is reflecting in their September quarter performance, with revenues of 18 realtors rising by 23% on a sequential basis, according to a report on the real estate sector by Citigroup Global Markets Inc.
Graphics: Yogesh Kumar / Mint
Still, sales have declined by 41% over a year ago.
The trend was similar for operating profits, which dropped by 50% year-on-year but rose 27% sequentially. Operating profit margins (OPM) have been improving from the quarter ended March.
The Citigroup report indicates a rise in OPM from 14.2% in the March quarter to 46% in the three months ended 30 September. But rising cost of construction and employee costs may result in this level not being sustained.
Until early this fiscal ending March, most of the frontrunners were highly leveraged. The turnaround in earnings coincides with a series of equity issues meant to retire high-cost debt.
For example, Unitech has raised $900 million (Rs4,230 crore) since April by selling securities to institutional investors.
Similarly, Indiabulls Real Estate Ltd and DLF, too, raised $550 million and $770 million, respectively, through the same route.
Real estate companies raised nearly $3.2 billion through qualified institutional placements and preferential allotments.
Since companies repaid debt with these funds, interest costs have fallen significantly and contributed to improved profits. On a sequential basis, the adjusted profit after tax for the sector during the September quarter is higher by 48%.
Going forward, the pace of project execution will determine sales and profit growth.
In the residential market, revenues accrue in stages depending on construction progress, with most revenue being booked closer to completion. Most projects are due for completion only in the second half of the fiscal ending March 2011. This implies upfront investment in operational costs such as employees, labour and construction, and may lead to a drop in operating profit margins in the interim.
Also, many developers have changed focus to concentrate more on mid-market residential projects rather than luxury ones. The changed mix could lower sales realizations and affect revenue growth rates in the near term. The Reserve Bank of India’s move to rollback provisioning norms from 0.4% to 1% for commercial real estate loans also signals more expensive loans.
These factors will hurt sentiment and may prolong the awaited rerating of the sector till the end of fiscal 2010.
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