Will real estate stocks recover after elections?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Real estate S&P BSE realty Index was introduced in July 2007 at the height of real estate boom in India. The S&P BSE realty Index was hovering at 7019.88 on 17th August 2007, whereas the S&P BSE Index was 14141.52 on the same day. However, by the end of 2007, the S&P BSE realty Index grew by whopping 81% to reach at 12727.42, while S&P BSE Index grew by 43% to reach at 20286.99.

And after growing in initial few months of 2008, the indices fell sharply in 2008. Realty index fell by 82%, whereas BSE Index fell by 52% in 2008 because of global financial crisis which was triggered by US sub-prime crisis.

Here is a history of S&P BSE realty Index compared with the S&P BSE Index:

Fall of real estate stocks

The BSE Realty Index stands at 1468.4 on 31st March 2014. The fall has been substantial and retail investors are shunning from buying the stocks of realty companies. Among 12 Indices such as BSE Realty, BSE Power, BSE Metal, etc, the BSE realty has been the worst performer. In 2013, the BSE Realty Indices fell by 32%. What could be reasons for under-performance of real estate stocks? We list down the reasons:

Reasons for fall

• Rising debt levels

The debt on balance sheet of 11 listed firms in BSE Realty Index stood at Rs. 42000 crore till 31st December 2013. High debt levels erode the profitability of firms because major chunk of income generated goes in servicing of the debt. And which in turn, puts strain on sustainable growth of the firm.

• Falling demand

Demand from home buyers has remained low on account of lack of job creation and high inflation. Companies have put off or slowed down their investment plans and therefore job creation has been low. At the same time, Inflation has put off the investment by home buyers due to falling savings rates. Unless, inflation moderates, the sector will continue to see weak demand from home buyers.

• High interest rates

Interest rates have remained high for last 2 years resulting in high cost of borrowing for home buyers and it’s not surprising that transaction volumes have come down resulting in drop in sales of realty companies.


Recovery in last month (March 2014)

However, March 2014 witnessed some sort of recovery in real estate stocks.

Will the recovery continue? There is all the likelihood of it and post elections, economic recovery is expected. This in turn could result in revival of realty sector on account of the following:

1. Improved GDP Growth
2. Housing prices have corrected and it presents buyers an opportunity to buy the home now
3. Moderation in inflation
4. Reduction in interest rates

Appendix:

BSE Realty Index comprises of stocks of following companies:

Anant Raj, DB Realty, DLF, Godrej Prop, HDIL, Indiabulls Real, Mahindra Life, Oberoi Realty, Omaxe, Phoenix Mills, Prestige Estate, Sobha Developer, Unitech.

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