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Wednesday, January 07, 2015
Interest rate cut key for real estate revival in 2015
The combined revenue of firms that make up the BSE realty index grew a meagre 2.3% from a year ago
The BSE realty index rallied 54% from April to June when the new central government built up hopes of reforms. But it soon shed all the gains when both the June and September quarter results indicated that it would still be a while before profits begin to perk up.
Even some of the festivals that fell in the September quarter did little to woo customers. The combined revenue of firms that make up the BSE realty index grew a meagre 2.3% from a year ago. That was lower than the June quarter’s year-on-year growth of 15%.
The subdued demand for housing is partly a result of the relatively high interest rates. Secondly, companies are putting new projects on hold, plagued by oversupply in most regions and a build-up in inventory.
A report by UBS Securities points out that residential inventories are near a seven-year high. Approval delays and cash-flow constraints have led to a construction backlog and cost overrun risks, respectively. In the meanwhile, some companies have done their best to lighten balance sheets through debt reduction. For instance, DLF Ltd sold assets through fiscals 2013 and 2014 to offset debt and strain on cash flows. Smaller firms Sobha Developers Ltd, Oberoi Realty Ltd and Phoenix Mills Ltd have fewer concerns.
The fortunes of real estate companies now depend to a large extent upon a reduction in interest rates. With the Reserve Bank of India expected to cut rates sometime this year, analysts believe there could be a rise in demand for property, especially in the residential segment. Lower interest rates will boost profitability for realty firms, too, considering their high leverage.
Analysts say while all companies are gearing up to cash in on an increase in demand, the ability to do so is varied. Real estate companies with exposure to smaller projects in the upper-middle price segment are expected to recover faster. Markets such as Mumbai and Bengaluru may fare well faster on interest rate reduction as affordability is higher in these cities.
Needless to say, companies who have a meaningful presence in these segments are likely to benefit the most this year.
Courtesy: Live Mint