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First quarter performance of real estate sector expected to be subdued on high prices, costs

Brokerages say high property prices curbing sales growth; higher costs of inputs and funds putting pressure on margins

The performance of the real estate sector will remain subdued due to low sales and execution on account of high property prices in the first quarter of 2011-12. Margins will remain under pressure due to a rise in input costs and the sharp increase in the cost of funds for developers.

IDFC has estimated a 2.5% y-o-y decline in top line of the real estate sector, led by HDIL (Housing Development & Infrastructure) and JIL (Jaypee Infratech). EBITDA margins are expected to fall to 40% (versus 51% in the corresponding quarter of the previous year as Jaypee reports normalised margins of 45% versus 83% in the year-ago period). However, margins are expected to compress across the whole sector.

PAT is expected to decline 31% y-o-y for the sector, led by JIL and HDIL. PAT margin has been impacted by higher interest cost. In the case of DLF, revenues would be boosted by plot sales in Gurgaon (about Rs700 crore) with EBITDA margins expected to return to higher than 40% levels. IDFC believes that leasing could witness some slowdown as the focus shifts to achieving higher rentals. In the case of JIL, revenue recognition is to come from group housing projects - 'Klassic' and 'Kosmos';  EBITDA margin should stabilise at 43%-45% levels (against 83% in the quarter last year, entirely from plot sales).

According to Angel Broking, during first quarter of financial year 2011-12, the BSE realty index widely underperformed the Sensex by 1,049 basis points on the back of corporate governance, restricted credit flow to the sector, and the expected increase in cost of funding for future projects.

Moreover, the RBI's (Reserve Bank of India) measures to tighten liquidity and curb speculative demand have further dampened the performance of stocks. It is believed that the recent correction provides a good entry opportunity into realty stocks with stocks trading at a significant discount to the one-year forward NAV, stability in volumes and comfortable balance sheet position. Angel has named Oberoi Realty, Anant Raj Industries and even HDIL (in contrast to Motilal Oswal) as best placed in the sector.

According to Motilal Oswal, which has interacted with real estate agents, the Mumbai real estate market remains sluggish, the National Capital Region market is worrying, but in the southern cities of Bengaluru and Chennai the market is steady. No major price correction is likely in any of the major metros, rather there could be a price uptick of 10%-15% in Bengaluru.

The brokerage has gathered that volumes are recovering in the commercial vertical and there are early signs of rental appreciation in the CBDs (central business districts). Commercial real estate buyers are likely to be attracted by superior product positioning and developers with significant near-completed commercial assets at attractive locations. Home buyers, too, are likely to bet on developers with established track records. Motilal Oswal has picked Oberoi Realty, Prestige and DLF among the better performers in the sector.

According to Motilal Oswal, rentals are strengthening marginally in city-centric micro-markets, but in the peripheral market rentals are under pressure. Steady leasing volumes would ensure a boost in rentals late in 2011-12. There is an increase in inquiries at in malls. But only completed/nearly-completed malls are gaining retailer response and closing transactions.

Motilal Oswal has also made a comparison of key cities in the real estate sector. The end-user driven Bengaluru residential market has been steady, with sales volumes up 50%-70% y-o-y, due to traction in new launches and moderate price appreciation. Volumes are likely to grow by about 30% in Bengaluru in the backdrop of a strong launch pipeline in the mid-income segment. However, delays in the approval process would defer most of the launches to the second half of 2011-12.

Chennai would remain a stable market with steady volume improvement and no major price increase. There were several new launches in Chennai and sales velocity remained steady (with a seasonal dip over the past couple of months). Volumes grew 30%-40% YoY and prices were stable.

After strong sales in the fourth quarter of the previous financial year , there has been a dip in volumes in Gurgaon over the past 2-3 months. Higher proportion of underwriting by real estate brokers and a large proportion of sales to investors could result in increased risk of secondary market supplies. Sales volumes in Mumbai are weak, with no meaningful signs of rationalisation in prices (though prices have not appreciated either). Delays in obtaining approvals, slow execution and low investor demand have impacted absolute volumes.

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