Real estate: mixed bag of results given the regulatory challenges in sector
Real estate firms with a strong brand image bounced back in spite of a slump in sales in the December quarter when demonetisation squeezed out liquidity
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Since the close of the March quarter, the BSE Realty index has been shedding its earlier gains. Investors are worried about the ability of real estate developers to comply with the new The Real Estate (Regulation and Development) Act, or RERA.
In the listed universe, however, a handful of companies have coped well with the challenges through FY17. Those with a strong brand image bounced back in spite of a slump in sales in the December quarter when demonetisation of high-value banknotes squeezed out liquidity.
Sobha Ltd and Prestige Estates Ltd surpassed forecasts of revenue and profit. Perhaps their presence in the more resilient southern market helped residential sales.
Also, their diversified revenue stream helped these firms cope with the slowdown in demand for homes. For instance, Sobha’s 7% year-on-year (y-o-y) revenue growth includes income from contracts, while Prestige’s 6% growth gets a leg-up from rental annuity income.
Of course, some firms such as DLF Ltd continued to reel under the pressure of huge debt and a pile of inventory of unsold homes.
Most developers cut back on costs such as marketing and administrative expenses to sustain profitability. New launches in the home section were low-key, too. Fortunately, commercial assets fetched robust yields on the back of rising rentals and demand in spite of the stress in the information technology (IT) sector. Other service sectors appear to have replaced demand. Hence, the operating profit rose for firms with a balanced portfolio—both on a year-on-year basis and compared with the preceding quarter.
However, huge interest outflows for firms such as DLF weighed on net profits. Of course, some such as Sobha and Godrej Properties Ltd beat estimates, too.
Apart from this mixed-bag performance in the March quarter, investor sentiment may be cautious for a couple of more quarters, given that new launches may be low-key until there is clarity for the sector both under RERA and the new goods and services tax (GST), due for implementation from 1 July.