RBI move likely to pep up realtors’ bottomline

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Realty firms on hiring spree againDLF profit crumbles 77%Realty demand up 15% in Q2‘Property rates to fall 25% in 12-15 months’

New Delhi, Nov 2: The RBI rate cuts has been the best piece of news for the realty sector in the second half of 2008.

All the listed realty companies registered losses for the second quarter, with the latest to join the list being DLF, the largest of them. It notched a 4% drop in profit after tax, with the second largest, Unitech recording a 12% decline. Others like Parsavnath and Omaxe experienced a sharper drop in their PAT at 78.69% and 87.29% respectively.

This is in sharp contrast to the trends of the last few years. Real estate companies normally have stronger third and fourth quarters. But this time industry experts expect the

last two quarters of this financial year to be even more dismal, because of the current slowdown.

The biggest worry for the real estate companies is the severe liquidity crunch. Since there was an RBI instruction to put additional risk weightage on loans to them, funds as it was costly. The meltdown has added to that.

Home loan rates have increased by 5% in the last four years. It has shot up from around 7.75% in 2004 to around 12.75% now. Not too many transactions are happening these days for a couple of reasons. Prospective buyers are waiting for home loan rates to come down and price of properties to crash. Meanwhile, speculators have also dried up from the market, which has made properties harder to sell.

Realty firms are facing tightening of liquidity from both sides. While the availability of funds from PE and loans from other sources are becoming more difficult to obtain on one hand, funds incurring from sales has dropped at the same time. And if loans are available at all—it is very expensive.

Analysts are expecting price correction of residential properties and rentals of commercial properties. Mansi Trivedi, analyst, real estate, Motile Oswal Securities, said, “Like all other asset classes price of real estate will fall further. In places like Bombay and NCR areas of Delhi where property prices had appreciated by more than 80% will see a crash of around 30% to 40%.”

Like most other analysts Trivedi expects this situation to prevail for another 18 to 24 months before an upturn starts. “Price crash is imminent”, says Trivedi, “as buyers are holding forth their purchases—developers have to give in.”

Another Bombay based analyst points out that the new focus for real estate companies to tide over the current situation is developing residential spaces in the mid income segment. They are also ensuring that there are consumers for the projects they are developing. For biggies like DLF and Unitech mid segment housing is in the range of Rs 40 lakh to Rs 60 lakh, while for Omaxe and BPTP it is in the range of Rs 20 lakh to Rs 25 lakh.

Rajiv Singh, vice chairman, DLF, said, “We are looking at conserving and enhancing liquidity rather than retrenchment. We have no plan to buy land. Our borrowing costs have increased to 16% from 12% a year ago.”

DLF will continue to buy back shares. It also has plans to use its surplus in the best possible way. DLF has a debt of Rs 14,000 crore on its balance sheet. However it has a healthy debt equity ratio of 0.6%

Singh wants a sharp and significant reduction in interest rates. He wants a level playing field for real estate where the risk weightage should remain the same.

Although IDBI Bank responded immediately after RBI announced a slash in key interest rates by reducing its home loan rates by half a percentage point to 11% other banks are still assessing the situation.

Renu Karnad, joint managing director, HDFC ltd, said, “Earlier when RBI reduced its interest rates our cost of funds did not change. We will see what kind of business sense it makes for us before we make any rate cuts.”

Shobhit Agarwal, joint MD, Jones Lang Lasalle Meghraj, said, companies are taking a lot of measures to protect their margins from being hit by the slowdown. “The focus of realty firms has shifted from large products like big office buildings and high residential buildings.”

Agarwal points out that utility with quality is the new focus. As a result, “budget apartment” is the new focus. Agarwal specified, the word “budget” should not be misleading. It does not denote a particular segment or price range in the housing sector.

Previously people bought residential spaces driven by their aspiration level and not by their pocket size. As the heat of the global slowdown is being felt in India, consumers have become more realistic and buying houses, which is apt for the size of their pockets.

Realty firms are restructuring and repositioning their products to ensure sales. Agarwal added, “ Some of them are shying away from reducing prices and throwing in freebies to attract consumers. A much better way of attracting consumers will be to reduce the price of the houses right away.”