There is a general perception that listed companies command more respect in the market, yet prima facie it appears that real estate developers shy away from getting listed in the stock market. Does the fear of reporting debt and other financials prohibit the psyche of getting listed? Ravi Sinha investigates.
Till a decade back such was the mad rush for raising money in the capital market that even the real estate companies with limited presence in select micro markets started launching projects across the country to showcase a pan-India presence. Significant increase in housing demand, organized retailing and liquidity boom from 2003 to 2008, led to huge increase in land prices and real estate values and most real estate companies had a great run.
Banks increased their lending limits to the sector. Private equity investors and other institutional investors also rode on the boom with huge investment in real estate IPOs. Retail investors joined the bandwagon expecting similar returns. Valuations were done purely on land bank valuations, a measure hugely prone to speculations.
The market slowdown, however, played spoilsport with this happy hunting ground and the real estate sector by 2011 woke up to the reality that raising money through IPOs was not conducive as the investors were increasingly exiting with all the listed realty companies trading way below their listed price by 2011.
As a result, six big ticket realty IPOs at that point of time either deferred or cancelled their plans of what could have been collective fund raising of INR 13,000 crore ($2.9 billion) in the Indian market. It looked like raising money in the capital market was no longer a smart strategy.
Listing or independence?
Listing of real estate companies could bring in some degree of transparency in the industry
Land records and transactions should be digitized and values should be made publicly available
Most of the realty stocks were overvalued at the peak cycle of stock market but the valuations have corrected quite sharply
There may be a bounce back from low levels of stock valuation, but the prospects are based on various ‘ifs’ and ‘buts’.
Time for cost & benefit
A real estate company primarily commands respect on the back of factors like quality of construction, structural design & amenities, percentage of loading, pricing, delivery time of the project and transparency and service to the buyer.
Listing, however, does have its benefits for a real estate player like it does for companies in any other sector since; listing improves the awareness about the real estate player, improves its brand equity and provides an avenue for fund raising and an exit route to the promoters and/or private investors.
Within the built environment of Indian real estate some analysts maintain that the nature of real estate business is not conducive for stock market since focus on quarterly results takes precedence over long term execution. There are others who maintain that the developers made the mistake of over exposing land bank and every possible asset in the first wave of IPOs. Today, most of the listed realty companies are trading way below the listing price.
There are some others who recommend that the nature of the real estate business is such that developers should ideally not get listed, unless it is necessary to attract foreign capital. Requesting anonymity, the CFO (Chief Financial Officer) of a listed realty company admits that the falling stock prices do affect the sentiments of the investors and dilute the brand equity in the process. The investors think twice before investing in the company or the project, assuming that the company is not looked at very respectable in the eyes of the retail investors.
“The moment you get listed, your focus is on the quarterly results, since the media runs after you with negative reports if the quarterly profits are not going up each quarter. Now, the problem with the real estate is that it is a capital and time intensive business where nothing moves forward in a short span of one or two given quarters. At times, a new launched project may show you in red for six to eight quarters, before it shows a healthy profit. It affects the brand positioning as it is a sentiment driven market,” says this CFO.
Financial analysts do not believe that the nature of real estate business is not conducive for stock market listing. According to them, there are many companies that are at project stage, or whose businesses are seasonal or cyclical in nature that are listed on the stock exchanges both in India and internationally.
Analysts and informed investors covering and investing in these real estate companies do understand the dynamics of the real estate business and make their decision based on fundamental factors such as the land assets, project status and management quality not only on the quarterly results which may be lumpy in nature and not necessarily comparable on Q-o-Q or Y-o-Y basis.
It is more the information content in the quarterly earnings’ announcements, which help analysts & investors in understanding the status of the projects and investments that make an impact on the investment decisions and thereby the valuations. Hence, any real estate company irrespective of its listing status should focus primarily on the actual execution and disclosures, since quarterly results are not a barometer for stock prices of real estate companies as the market largely understands that they could be lumpy in nature.
Crisis of credibility
Rattan Hawelia, Chairman of Hawelia Group asserts that the liquidity concerns of the serious players were always being addressed, whether with the stock market or with other investment vehicles. With overall Sensex fluctuating, the stock market was not seen as a viable option as realty index was following the overall pattern. But with some of the sectors improving due to improvement in macro economic scenario, real estate too is bound to show northward movement once the enabling issues are addressed.
“I have a strong feeling that the sector has been a victim on the capital market due to its negative projection. Despite the fact that nearly all the developers who filed the DRHP were having real estate as the main business and hence they gave full disclosure on debt-equity and land bank, they were projected as companies in crisis. On the other hand, some other sectors with absolutely no land bank or any other physical asset got away successfully on the stock market with projected revenue, since the industry at large was projected as growth driver of economy,” says Hawelia.
The Indian real estate industry is highly fragmented with large number of small developers. Given that the funding for these real estate players generally happens at project level, there is little requirement for these real estate companies to be listed on the stock exchanges. Listing requires real estate companies to have higher disclosures and transparency in their operations.
Given that there is little transparency in land value and other costs of these companies and on account of the current weak economic scenario and lower market valuations currently being assigned to these companies, there is little incentive for these companies to get listed on the stock exchanges.
