The mood was sombre in the December quarter among real estate firms. The November ban on old, high-value banknotes affected the real estate sector hugely, given that it is infamous for cash transactions.
As liquidity was sucked out of the system through the note ban, and with the fear of unearthing “black money" transactions looming over the sector, residential unit sales on a pan-India basis fell 30-40%. In fact, realty firms were among the worst performers in terms of revenue and operating performance.
For instance, the net consolidated revenue at DLF Ltd—the largest developer—plunged 29% in value terms. Even the more conservative Sobha Developers Ltd, which has a strong southern presence, posted a 22% drop in revenue year-on-year.
Likewise, the entire sector saw tepid sales, almost nil new launches and even cancellation of booked units by customers, on fears that demonetisation could slow down the process of recovery in realty. Obviously, this had an impact on profits, too, in spite of firms being proactive in controlling marketing costs. Hence, profit margins shrank, too.
Discernibly, though, those with a significant exposure to commercial assets sailed through plummeting residential sales. The quarter saw sector analysts turn positive on demand and rental rates for office space and malls. A report by Emkay Global Financial Services Ltd says, “amid the demonetisation storm and the high debt levels, we prefer firms that have a strong portfolio of operational rental assets and mid-income housing."
The December quarter results show that rental income from commercial property is alleviating, at least partially the financial implications of rising interest costs from the unsold inventory burden in residential projects. Even the real estate investment trusts (REITs) and private equity firms that are bold enough to enter the realty space, prefer commercial assets. So, firms such as Phoenix Mills Ltd, Prestige Estates and Developers Ltd and Brigade Enterprises Ltd are on a stronger foundation for now.
Meanwhile, although the BSE Realty index has recovered from the demonetisation blues, retail investor interest is likely to be restricted to firms with asset-light balance sheets or with exposure to retail and commercial segments as a recovery in residential unit sales is still a long way off.