Stock market gains to help real estate
In the past three years, real estate has been one of the worst hit industries. It has suffered due to various reasons — land prices have stagnated, housing demand has stagnated, commercial demand has shrunk, interest rates have gone up. Access to capital for real estate firms has been restricted by RBI and other factor adding to woes of the sector is limited housing mortgage exposure for banks by assigning high risk-weights.
Banks are worried that weak sales have weakened the abilities of developers to service their loans. The Debt:Ebitda ratio, as per rating company Fitch, is now at a six-year high. EBIDTA is earnings before interest, taxes, depreciation and amortisation. DLF has been forced to sell some of its assets to decrease the debt burden. LIC Housing Finance has taken over property developed by Unitech and Orbit Corp, after the two real estate developers defaulted. The sector has not attracted a great deal of overseas funds. In the calendar year 2013, only $1 billion came to India through overseas route.
The industry is hoping the new elected government to be a game changer. The industry is waiting for REITs (Real Estate Investment Trusts) to receive government nod. These instruments are like mutual funds that can be divided into small units, which can be sold to individual investors. This will be a very good source of funding for the sector which is now having very limited options of funding.
In 2008, the concept of REIT was beginning to gather attention but it did not get popular due to US Subprime crisis. Since then there have been four proposed tax treatments that have been put forth for approval.
The cost of debt is very high right now. It is close to 20%. REIT and a boom in the stock market could come as a boon for the sector. The companies can make a follow on offer if the market is good.
The sector, as a whole, has been underperforming since last five years. If we look at last 12 months, they seem very dismal for the sector. The Nifty has gained about 18 per cent since April 2013, the realty index, which tracks 10 listed real estate firms, has lost 24 per cent. Delta Corp and HDIL were the only gainers over the past 12 months. The other eight companies (DLF, Unitech, IBRE, Sobha, Godrej, etc,) all lost ground in terms of share prices.
However, during the last month, the real estate index went up 7 per cent. This happened despite the fact that DLF went down. The stock has the highest weight age in the index.
Source: Business Standard
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