Real-estate stocks have become the first victim of rising interest rate and inflation. Almost all real estate stocks are trading at 20%-40% below their 1 December 2006 levels. The leading market index Sensex, during this time, ran up near 1.77%—from 13844.78 on 1 December to 14,090.98 on 13 February 2007.
Market participants attribute this to the double whammy of high property prices and rising interest rates and inflation figures. “We have found that for the time being, real-estate prices have stopped rising. The reasons for this are the high prices and interest rates,” said Hitesh Kuvelkar, associate director with First Global, who recently conducted a five-city survey on real-estate prices. The survey, in late January 2007, was done in Delhi, Mumbai, Bangalore, Chennai and Pune.
“Speculative investment in real-estates has virtually stopped as people are no loner taking postions,” said Kuvekar, hinting that speculative interest was driving these stocks to such levels. Others agree. “Real-estate stocks had gone up substantially on land bank stories with unrealistic valuations. These stocks had gone up many times in the last two years. This correction is good for the market,” said Rajen Shah, chief investment officer,Angel Broking.
The downturn in real-estate stocks may affect the plans of many who are planning to raise money through initial public offerings (IPOs). Some prominent names such as DLF have plans apart from companies like Pune-based Kolte-Patil Developers, and Bangalore-based Puravankara Projects Ltd.
Other factors contributing to depressed sentiment are rising input costs and over-supply of housing stock in certain pockets. In many cities, real-estate prices have more than doubled in the last two to three years and at the same time interest rates have moved up substantially. Housing loans rates moved up from 7.5% two years back to over 10% at present.
“Inflation is not going to come down soon and the Reserve Bank, while trying to keep it under control, will tighten liquidity further, leading to higher interest rates. This scenario is likely to remain so because inflation is an election issue. Real-estate prices are likely to remain stagnant for some time,” said Kuvekar
However, not everyone agrees to the view that house prices have gone up too high. “The economy is growing at 8-9% and salaries have gone up seven to eight times compared to four years back, while housing loan rates are still much lower than the 16-17 % which prevailed some years back,” said Alok Agarwal, senior analyst with Motilal Oswal.
“What will happen is that higher supply (of housing stock) will keep the prices in check. For those companies that have acquired their land banks when the real-estate prices were lower, the business will be lucrative,” said Agarwal.
Agarwal also agrees that if inflation is not contained within a year, the sector will suffer through the year. “The situation need to be monitored carefully. Different markets will react differently. Delhi real-estate market will behave differently to Mumbai,” he said.