Tuesday, November 27, 2007

Real estate: It's still a good story

If the street was disappointed with the September quarter numbers of real estate companies, it was willing to forgive and move on. No developer really turned in spectacular results but you wouldn't guess that from the manner in which share prices have rallied.
Unitech's consolidated profit numbers, for instance were way below expectations at Rs 401 crore (Rs 4.01 billion), thanks to a delay in some of its projects and the resulting lower revenues. But at the end of October, the stock was trading at  levels of Rs 383, up about 50 per cent since August.
DLF  saw a sequential fall in operating margins to 69.7 per cent and if the net profit was higher by 33 per cent, it was only because of  a lower tax rate and a smaller outflow on interest.  But the stock was firm at Rs 950 levels post the results though it has since corrected to Rs 825 levels.

The signals from the industry are somewhat mixed; the developers, as also some industry watchers, say the story is far from over. Even if there is over-supply in some pockets, the long-term demand, they claim, is intact.
However, a recent report by Deutsche Bank  cautions that  IT companies - which drive three-fourths of the demand for commercial space - will be compelled to prune costs and therefore prefer to operate from smaller towns rather than Bangalore or Hyderabad.
The Bangalore-based Sobha Developers' [Get Quote] though is convinced that Bangalore will remain a preferred city.  Says Says P Kanodia, CFO, Sobha, "Our plans have not changed and even now 75 per cent of our projects are in Bangalore."
Sobha's top line stayed flat in the September quarter, but according to Kanodia it's only because no project has seen a  25 per cent completion.
"We haven't been able to recognise revenues for several projects but we will make up for it in the next couple of quarters," claims the CFO.

Even the Delhi-based Parsvnath Developers [Get Quote], which sprung a nasty surprise on analysts when it disclosed that receivables had piled up to over Rs 1000 crore (Rs 10 billion), claims there is nothing to worry about.
Says Chairman Pradeep Jain, "The bookings are strong but the buyers are paying in instalments and the receivables will come down after we receive a few more payments." Incidentally, the rise in receivables at Rs 400 crore (Rs 4 billion) is the same as the turnover of Rs 400 crore in the quarter, though the management has said it will clarify the numbers.
However, with net receivables now at more than five months sales compared with about two and a half months in March, analysts are concerned. The developers, however, seem optimistic. They dismiss anecdotal evidence of prices in several cities remaining flat or even coming off by 10-15 per cent, claiming that the market is actually looking up.
"For sure, the increase in prices may not have been as sharp as in the previous year but prices are up nonetheless," asserts R Nagaraju, GM corporate planning, Unitech. The demand from corporates in some pockets is particularly strong says Nagaraju citing the example of Gurgaon where rentals today are about Rs 70-75 per sq ft a month compared with Rs 45-50 a year back. Unitech, claims Nagaraju, is holding back some of its commercial space in anticipation of better prices. "We're expecting prices to firm up further," he says. Adds Parsvanth's Jain, "Malls are now willing to pay rentals of even Rs 100 per sq ft."

But even developers concede that demand has tapered off in the residential space.  Sobha's Kanodia concedes that it is taking longer to sell residential flats that it used to. "Compared with just a few weeks in 2006, it currently takes as much as nine months to complete transactions and that's because the speculative element has gone out of the market," he points out.

Sobha is currently working on projects covering 12 million sq ft, most of which are in Bangalore city while DLF is averaging four million sq ft a quarter. No developer seems to have rolled back construction. Whether they will rake in the moolah, only time will tell.


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