The September quarter performance of real estate firms is unlikely to provide any positive surprises. A weak market is a key reason for this, as sales of residential projects in the past three months have been subdued and show no growth over the year-ago period or the preceding quarter.

This has made builders cautious about the number of new launches across realty firms during the quarter was insignificant. Weak demand can be attributed to high interest rates and high property prices in most metros and urban areas.

The operationally weak quarter is almost a non-event, says a report by Emkay Global Financial Services Ltd. It estimates sales of 0.4 million sq. ft for DLF Ltd, versus 1.3 million sq. ft in the year-ago quarter. Likewise, sales by Prestige Estates Projects Ltd is expected to be lower at 1.5 million sq. ft compared with 2.1 million sq. ft a year back. Few firms such as Sobha Developers Ltd may show an increase in sales, given that the absorption of residential apartments has been better in Bangalore in the last couple of quarters.

Further, there has been no improvement in the stretched balance sheets of most realty firms. Interest costs are high and are eating into profits. Those with high interest outflows such as DLF, therefore, are likely to see a dip in net profit. One can expect a mixed bag in terms of net profit during the September quarter, depending on the income booked during the quarter, the costs incurred on construction, and impact of interest outgo.

Strangely though, in spite of the weak demand, real estate prices are not falling, after rising over the past six months. According to industry reports, property prices in most residential areas in Mumbai have risen by over 50%, while that in Chennai and Pune are up by 20-25% from the lows in 2009.

Although this is a positive sign from an investor standpoint, interest rate cuts could be the main trigger. This would bring back retail interest in residential projects, boosting sales volumes.

There is talk about the finance ministry’s intent to revive the sector, according to a report by Religare Institutional Research, which could come by way of lowering the risk weightage of advances to the sector or lowering repo rates.

Moves to refinance loans at lower rates could also bring down interest costs of debt-laden firms, thereby shoring up the net profit.

Certainly, on an average, the outlook seems stable for realty firms, after much pain seen in the past eight quarters. Any strong rise in sales during the forthcoming festive season could signal better times. Perhaps, that’s why the realty index has started inching up and is outperforming the benchmark Sensex since the past one month, in spite of the fact that the September quarter performance is expected to be dull.

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