Track2Realty Exclusive: Nearly Real estate stocks have been on a roller coaster ride for the last few years but 2012-13 has been witness to some stability in the realty index. Critics call it more speculative than any other index as the disconnect between the respective company and its stock has often been devoid of logic.
Track2Realty studies the stock market performance vis-à-vis the realty companies’ overall brand equity to find realty stocks can not be a brand barometer as various factors (within & beyond company’s control) do play a role in stock movement.
The optimists within the sector assert the worst is over for the realty index and most of the listed realty companies are determined to cut the debt. In addition, they maintain that stock market performance is not the barometer to judge the company’s financial performance or the brand image.
Critics, however, allege barring a couple of exceptions, most of the realty stocks are today trading way below the listed price.
Those who believe in the glass half full theory of optimism, however, term it as the fundamental reason why realty stocks will do better in the days to come. They believe the resilience of realty stocks have weathered the worst cycle of economic meltdown where most of the realty companies had to restructure their portfolio.
Moreover, the stock market itself has not performed well post Lehman crisis. The sectors considered as high-beta sectors (high co-relation with index) have therefore not performed that well like infra, real estate, telecom, banking etc. All have seen re-rating and hence stocks are trading below their listing prices.
Most of the real estate companies were listed in the boom period of 2005-2007 where the outlook was overly positive & there was large liquidity flow in markets. With the change in the international economic situation & downturn in the domestic stock markets the stock prices of these companies had steep variation.
Due to the uncertain environment from 2009 -2012 the share prices of these real estate companies have not been able to recover. The second factor had been that in the boom time land bank was a major valuation criterion & not the actual projects being delivered or the capability of being delivered in a timely manner by these companies.
The recovery of realty stocks in the last one financial year has been the culmination of several factors. One, investors’ belief that realty firms have hit the bottom; two, improved financials as realty firms tried to lower debt by raising funds through equity or divesting non-core assets as with DLF Ltd. And the third factor is the hope that a fall in inflation and interest rates will lead to sector’s profitability in the year ahead. Through the slump, firms like DLF, Indiabulls and Unitech have tried to hasten execution and cut construction costs to ease pressure on profit margins.
Today, majority of realty projects are delayed owing to multiple factors ranging from regulatory approval delays, land acquisition, liquidity crunch, inadequate planning, restricted project & execution capabilities, lack of scalable processes and trained resources.
Stock rationalization when coupled with higher demand and sales, will improve the return on equity of real estate firms. Historically, sales have improved with a reduction in interest rates, which is expected in the year ahead.
…to be continued
