The situation in the residential property market is still grim. The Knight Frank Prime Global Cities Index Q2 2017 showed that amid a global pattern of weakening prices for luxury residences, a declining trend engulfed Indian metros. For the April-June quarter, Bengaluru, the city that was so far resilient, suffered a decline from the year-ago period. Delhi prices declined too. Mumbai managed a slight growth.
As if sensing this, the investor sentiment that was all gung-ho after the new Real Estate (Regulation and Development) Act was enforced has suddenly turned negative too. Retail investors who followed the herd would have seen value erosion last week as the BSE Real Estate index plummeted by 15%. Shares of leading listed firms like DLF Ltd, Indiabulls Real Estate Ltd, Unitech Ltd and Prestige Estates & Projects Ltd all fell by 6-10% in Thursday’s trading session. Indeed, the weak market sentiment also fuelled the sell off in these stocks.
However, the Knight Frank report did not trigger the sell off. Perhaps investors reacted to the announcement that banks would henceforth lend only to realty developers that are registered under RERA. This could aggravate the already tight liquidity situation faced by realty developers.
As such, the operating cash flows of most firms catering to residential property market are impacted due to limited sales for several quarters.
Rising debt burden and defaults are no longer surprising. A case in point is the recent development where the large Mumbai-based developer Housing Development and Infrastructure Ltd (HDIL) failed to repay Rs144 crore subsidiary debt to the banker. The stock plunged 45% in five trading sessions although it retraced a bit after the management, on Wednesday, assured a one-time settlement was in the offing.
Then, there are large firms like DLF that are struggling to monetize assets.
For the firms in the BSE Realty index, the average interest cover ratio that indicates whether the profits generated are sufficient to pay the interest costs has been falling since the slowdown in 2012. From an average operating profit of nearly three times the interest cost paid in March 2011, the ratio is down to 1.3 in March 2016. A few firms such as Kolte-Patil Ltd and those with commercial lease income like Phoenix Mills Ltd and Oberoi Realty Ltd, however, are on safe ground, as the segment is better off.
In other words, the respite expected from RERA for customers and consequently investors in realty firms, now appears to be a mirage.
As less than half the number of states in the county have implemented RERA, the pace of new launches will slow down. In another recent report, Knight Frank had said that the current sentiment score in Indian real estate has moved into the negative zone and reached Q42015 levels (see chart). But then, there is hope for the future.
It said, the “wait and watch mode” is still prevailing in the sector in the expectation of clarity on various policy measures by the government in the next six months.”
Given this uncertainty, equity investors may see huge swings in the stock prices of realty firms until more clarity emerges with a sustained rebound in property sales and prices.