Realty firms bank on commercial real estate to bring home the bacon
Companies with annuity assets will have a sizeable revenue stream in the next two to three years, analysts say
The BSE Realty Index had a roller-coaster ride in 2018. It is now more or less where it began the year, which pales in comparison with a 106% surge in 2017 on investor hopes that reforms would usher greater transparency in the sector.
While the reforms are a long-term positive, stringent regulations and the time taken for firms to account for policy changes have caused near-term stress. Along with the liquidity crunch at non-banking financial companies, this impacted volume. Inventory levels eased only marginally, deterring new launches. Prices have been stagnant too.
“Average property prices at the pan-India level rose by only 1% in 2018 from the previous year to ₹5,545 per sq.ft,” said Anarock Property Consultants Pvt. Ltd,
Surprisingly, despite tardy growth through the year, the office property segment has done well. According to Anarock, office space absorption rose by about 19% in 2018, crossing 39 million sq.ft. So, realty developers with a greater mix of commercial rental assets and retail shopping malls posted better results in the first two quarters of 2018-19.
Meanwhile, the Real Estate (Regulatory and Development) Act, 2016 has ushered in more transparency. Leading listed firms that were debt-laden have trimmed borrowings considerably, with some tying in private equity investments too. Yet, weak sales due to sluggish market conditions kept the ratio of interest cost to sales at elevated levels, especially for firms with a higher residential portfolio mix.
The trend of better income expansion for those with commercial (annuity) assets comprising office, retail and hotel, mix in their portfolio is expected to continue. Developers with residential projects are likely to shift towards affordable housing given 41% share of this segment in total home sales in 2018.
Adhidhev Chhattopadhyay, an analyst at ICICI Securities Ltd, argues that companies with annuity assets and those investing in capex to add more such assets, will have a sizeable revenue stream in the next two to three years. This will account for 60-70% of their enterprise value. “These annuity assets would act as a cushion for valuations in all these companies through cycles,” he says. On the other hand, a gradual reduction in housing inventory and the new percentage completion method of accounting will make revenue and earnings accretion lumpy. This could weigh on stock valuations of such firms.
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