Real estate stocks: What to expect?

Over the past few months, real estate stocks have been laggards on the bourses, with some losing as much as 30% since the beginning of the year (refer table below). Rising interest rates and unrelenting property prices have led to fears of an imminent slowdown in the sector. However, the hullabaloo surrounding the recent public issue of India’s biggest real estate company points towards renewed optimism among investors. Has anything fundamentally changed for these companies? Should investors consider taking exposure to the real estate sector? In this article we will try answer some of these questions. Long-term fundamentals still intact: We believe that the long-term demand drivers for the sector like demand-supply gap for residential housing, rising disposable income, fiscal benefits available on availing of home loans and demand for office space, especially from the IT/ITES segment remains intact. According to industry estimates, the Indian real estate industry is expected to grow at a compounded rate of 33% between FY05 to FY10, mainly driven by the residential segment. ...But not with short-term hitches: Demand for residential properties tends to be highly price-sensitive. Though the underlying demand for housing is huge, increasing property prices and higher interest rates lead to postponement of purchasing decisions and thereby result in slower off-take. Residential properties in Mumbai have already witnessed a drop of 15% to 20% in the past few weeks. A further increase in mortgage rates is likely to have a significant impact on the demand going forward. Timely execution of projects - A pipe dream: Most of the real estate companies have lined-up huge development plans going forward. The total area to be developed over the next few years by them is nearly 20 to 30 times the size of projects executed so far. Hence, we are of the opinion that the same is unrealistic and there are likely to be delays. Project delays will result in earnings disappointments and thereby put pressure on stock prices. As far as future performances of these companies are concerned, we believe that it would be prudent to be conservative as far as execution capabilities of the companies are concerned. Also, high property prices, especially in the residential segment may not sustain for a long period. As such, we would advice our investors to have a cautious approach as far as real estate stocks are concerned.[From Internet]