As real estate prices shoot up and interest rates, the outlook for the sector does not look too bright.
In its year-end report, Knight Frank has stated that new home sales in India have fallen by 25 per cent due to soaring prices. With the Reserve Bank of India tightening lending norms to developers and raising interest rates, the property market is likely to plumb new lows in 2011 as buyers disappear. Interestingly, buyer aversion is not in the pirce-sensitive category segment, but in the premium category (upwards of Rs 7,500/sqft).
Developers may find it rather tough to sell apartments at prevailing rates. As liquidity starts drying up, developers may find it tough to sell housing stock at current prices, which have risen more than the peaks of 2007-08. Both HDFC and SBI have seen a drop in mortgage transactions by 15-20 per cent in Mumbai. However, personal incomes in India have been steadily rising, recording a compounded annual growth rate of 15 per cent, says Citi’s report on state of the real estate industry in India, and if prices fall by 15-20 per cent, the demand may well return.
However, valuations of realty stocks have priced in all the negatives and the BSE Realty Index has corrected 35-45 per cent over 
the last few months. The realty index has hit a 22 month low. Analysts say property stocks traditionally trade at up to 40 per cent discount to their net asset values.
At these levels, stocks become attractive, believe analysts, if execution risks are limited. While in the short term, negative news flow has made this sector a pariah, it’s possible to cherry-pick stocks as demand is likely to revive in the medium term. Citi believes that while DLF has a good diversified land bank and strong commercial presence, its debt/equity ratio is a challenge. Citi believes that Indiabulls Real Estate is a high risk pick in the sector even as the stock is trading at a 50 per cent discount to its NAV. The thumb of rule should be companies which have a large part of assets on the ground and which have low execution risks.
