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Over the past week, the ML Real Estate Index has shot up by 7%. Analysts attribute mixed reasons for this upward movement. Talks on the relaxation of FDI norms, coupled with realty stocks being laggards in the recent rally, may have led to this speculative up-move
Big real-estate players like Unitech Ltd, Omaxe Ltd and DLF Ltd's stock prices have shot up by almost 15% over the past seven days - starting from 7 July 2010. Unitech Ltd's stock price was Rs72.7 on 7 July 2010, it jumped to Rs83.25 on 13 July 2010 (a 15% jump in the scrip).
Omaxe Ltd's stock price was Rs95 on 7th July, it jumped to Rs107.85 on 13th July (a 14% jump). DLF Ltd's stock price was Rs279 on the 7th, it jumped to Rs316.05 on 13th July (13% jump). Analysts from various broking firms attribute varying reasons for the stock movements.
The rise in stock prices has led to rise in property prices, which are already reaching for the stratosphere. There is also a rumour going around that the government will relax the three-year lock-in period clause for repatriation of foreign direct investment (FDI) in the realty sector. This has caused realty stocks to move up. Even the fact that a number of realty companies have lined up initial public offerings (IPOs) has caused the rise in stock prices, according to some analysts.
Sheetal Malpani, analyst, BRICS Securities, has a different viewpoint. According to him, the market expected tightening of monetary policies by the Reserve Bank of India (RBI) and increase in interest rates by 100 basis points in the next six months. That fear has abated, because the RBI has raised its short-term lending rate by a total of 75 basis points in 2010 to 5.5%. But still, banks have not increased interest rates for home loans.
Another reason is that real estate stocks are playing catch-up. Over the past six months, real-estate stocks have drastically underperformed. But after the news on new gates (possibly) opening up for fresh funds to enter the sector, stock prices have gone up. Under-performing realty stocks are now mirroring the revival.
Param Desai, analyst, Angel Broking said, "There are no specific reasons behind the rise in stock prices over the past seven days. It is due to the rumours floating around in the market regarding FDI norms being relaxed. Several IPOs are waiting to hit the markets in the next two months."
According to recent FDI regulations, a foreign investor has to bring in a minimum of $5 million to participate in a joint venture (JV) with an Indian developer, while the rest of the money can be brought in later, in tranches. The rule states that original investment cannot be repatriated before a period of three years from the completion of minimum capitalisation.
Until now, the interpretation has been that the three-year lock-in applies only to the'original' or 'minimum' investment of $5 million and not to the entire money that the foreign investor puts in. For instance, if a foreign fund invests $500 million, the interpretation has been that it can recover and repatriate up to $495 million before three years while the balance $5 million can be repatriated only after three years.
However, last year, the government issued a notification saying that 'original' investment would apply to the entire investment that a foreign partner brings into a particular project, a move that was enough to wean away potential foreign investors from the Indian market and stymie their Indian plans.
It is mainly speculation which has pushed up stock prices, because there are around a dozen realty companies which are in the queue to launch IPOs. Big real-estate firms are sitting on IPO plans worth over Rs12,000 crore after receiving a nod from the Securities and Exchange Board of India (SEBI). They are, however, waiting for the market conditions to improve further before starting the sale process.
Sahara Prime City (plans to raise Rs3,850 crore), Emaar MGF (Rs3,450 crore), Lodha Group (Rs2,800 crore) and Ambience (Rs1,125 crore) are some of the major real-estate players who have announced their IPO plans last year, but are yet to launch their offers.