Real estate: Decent results masked by demonetisation fears
Cash crunch may see realty prices cascade down as demand declines, but mid-segment housing may be less affected; buyers may also defer sales, adding to balance sheet stress
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A gradual reduction in surplus residential stock, along with strong regulatory changes in real estate norms, had ushered in a hope of transparency and a revival in the sector.
But naysayers now expect demonetisation to cause further pain in the sector.
Simply put, demonetisation will lower liquidity in the hands of potential buyers. Real estate was among sectors that saw a high amount of cash transactions. In a way, this helped divert money to real estate through the developer-buyer nexus and the cash component also helped reduce stamp duty, especially on large transactions.
Demonetisation will dampen demand for residential units. As such, the sector is reeling under high inventory levels for about 3-4 years. In any case, the September quarter results did not brighten the mood as sales in the National Capital Region centred on New Delhi were dull. Pune and Bengaluru, too, turned weak while there was activity in some pockets of Mumbai.
Of the breed in the listed universe, the firms catering to niche markets did better than those with pan-India operations. Sobha Developers Ltd turned out results in line with estimates, while Phoenix Mills Ltd topped forecasts. Sobha’s prospects look bright, given that most sales are to the salaried class and backed by housing loans, thereby insulating it to some extent from the backlash of demonetisation.
Phoenix’s revenue is supported by strong rental income from marquee properties that will partly at least offset any temporary dip in residential unit sales.
Oberoi Realty Ltd also fared well on the back of better-than-expected sales in the September quarter.
Note that on the whole, commercial leasing activity was the bright spot.
Meanwhile, the liquidity crunch may see realty prices in large cities cascade down as demand declines. However, mid-segment housing may be less affected. Buyers may also defer sales, adding to balance sheet stress as inventory remains in the pipeline.
Large land transactions are likely to be on hold, too, as these are often backed by cash transactions. Little wonder therefore, that the BSE Realty index plummeted 30% since demonetisation on 8 November.
That said, regional developers, like those mentioned above, have better balance sheets and lower leverage. The increasing investments by private equity firms into realty projects in the past year is likely to slowly bring back confidence.