The travails of the realty sector continue. The relatively better performance posted by realty firms in the March quarter was only a blip. Blame it on tight liquidity, which slowed the pace of project execution or a drop in demand for both residential and commercial units because of sticky interest rates and the slowdown or simply on the seasonality, the fact is that the June quarter’s net revenue of realty firms fell from the year-ago period, by an average of 13.4% (going by stocks in the realty index on the Bombay Stock Exchange).

In a recent report, Edelweiss Securities Ltd said demand weakened in the past three to six months because of high property prices.

For instance, DLF Ltd’s residential sales were down to 1.3 million sq. ft against 2.3 million sq. ft a year-ago. Net revenue, too, was down 10%. Others like Housing Development and Infrastructure Ltd and Indiabulls Real Estate Ltd registered a 66% and 11% drop in sales, respectively.

Only niche firms like Godrej Properties Ltd and Oberoi Realty Ltd with locational edge in new properties and smaller revenue base posted growth of 63% and 24%, respectively.

Further, Godrej Properties’s strategy to go in for joint development and re-development projects helped generate better cash flows and margins. Some like Sobha Developers Ltd have sustained sales volumes on account of its significant exposure to the mid-sized housing segment. However, industry reports suggest there’s customer resistance to fresh purchases because of high prices that still prevail in the market.

Needless to say, the sector is debt-laden, with interest expenses outstripping cash flows. For example, DLF’s June quarter cash from operations was about 665 crore against interest and guarantee charges of around 740 crore, which ate into the cash balances of the firm. Hence, while tight expense control and outsourcing of activities helped contain profits at the operating level, it was down by around 3%, interest costs soared and dragged net profit down by around 18%. Likewise, average net profit for the June quarter of realty index stocks was down by around 24% from the year-ago period.

At this juncture, several firms are trying to divest non-core assets to repay debt. But, only large divestments will help save the situation along with a pick-up in sales.

According to some realty brokers, a strong uptick in sales is unlikely till 2014 in both the residential and commercial segments. The only other trigger for demand could be a fall in interest rates and inflation or an economic revival, all of which seem distant.

Vatsala Kamat

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