New Delhi: India’s real estate stocks that once paralleled the boom in property values may start to see more softening, in line with the tepid market. And the recent drop in their values will likely stay until property developers start executing and selling more projects, say industry experts.
After the stock market crash, real estate stocks have been trading at a discount of 15-50% to their net asset values (NAVs), or the value of their assets less liabilities. India’s largest developer, DLF Ltd, and the second largest developer, Unitech Ltd, have seen their stock values fall by 40-50% in the last three months. This is in contrast to the high valuations the real estate sector saw when the benchmark stock market index, Sensex, had hit an all time high of 21,207 points on 8 January. But, by 17 March, the Sensex had fallen to 14,809 and by the end of April it was at about 17,287.
Analysts say property stocks are overvalued and a correction in stock prices is bound to happen. “Indian real estate companies are overvalued,” said Jimmy Olson, managing director of JSB Management Services Ltd, a UK-based real estate advisory company. “DLF, for instance, was overvalued by 50-60% at the time of its initial public offer.” DLF, which was listed in July, priced its offering at Rs525 a share.
“What we are seeing now is only a correction in the real estate stocks,” Olson said. He expects stock prices to recover in the next two-three years after companies start executing projects that they have announced. JSB Management does not invest in real estate stocks, but advises developers on private equity deals and public share offerings.
A recent Morgan Stanley report also said the stock price of DLF is likely to drop to Rs577 per share because of delays in the company’s home and retail businesses and sluggish demand in the market. The new share price target is 30% less than the previous target of Rs828, according to a research note dated 24 April.
Macquarie Research analysts Unmesh Sharma and Bharat Rathi also reduced their target price for DLF from Rs1,220 to Rs880.
In their report, they cited three reasons for reducing the price target: benign residential price growth along with a fall in prices in certain markets, delay in listing of DLF Assets, an associate company, and little value from new land purchases.
DLF’s shares have shot up since their Mumbai listing. However, the overall appetite for real estate stocks has been lukewarm since then.
Rival Emaar MGF Land Ltd, for instance, had to call off its IPO as investors stayed away, and other developers have postponed planned overseas listings of units amid a global erosion of equity assets.
Valuation of real estate companies will come down, said an official with a global financial management and advisory company, who did not want to be named as he is not authorized to speak to the media.
“Real estate companies cannot be valued on the basis of their landbank,” he said. “They have substandard land in places where there is no infrastructure, no water, no power...” So, there should be a correction in real estate valuations, he said.
Property stocks will be halved in value, said another official with a global investment banking and securities firm, who, too, did not wish to be named as he is not authorized to speak to the media. “Developers have taken on more projects than they can execute and valuations will not improve until we see projects actually being executed.”
According to the Morgan Stanley report, one of the reasons for downgrading DLF’s stock is because around 60% of its landbank is in three locations where major projects may not be developed for another 12-18 months.
Analysts also believe the correction in property stocks will be accompanied by a correction in real estate prices across the country. “I think the stock market correction is a leading indicator of a correction in property prices,” an executive at an international financial services group said. “We will see a correction in land prices.”
Developers in India were riding a high after an unprecedented economic boom and tax benefits for home buyers made it attractive for thousands of Indians to own homes. The resultant demand and boom also resulted in speculative buying, or flipping —holding properties for a short while to cash out on gains.
However, untenable home prices and interest rates that have steadily risen, along with inflation that has crossed a three-year high have taken some of the froth out of the buying and is forcing prices lower in some pockets such as the suburbs of the top cities.
“Developers need money and if they can’t sell projects at the current high price levels they will have to bring down prices,” Olson said.
However, not everyone thinks real estate valuations will come down. “Real estate stocks have fallen but this has got to do more with the meltdown in the global markets,” Kaustubh Kulkarni, managing director, investment banking, JPMorgan India, said. “I think real estate stocks will recover when the market conditions improve.”