Realty Sector: Down With Debts, Yet Paying High Dividends

Mumbai and Delhi are the most important cities in India in every aspect. Mumbai being the financial capital and Delhi being the political capital are understandably the most active residential markets in the country. Yet, the real estate markets of both these cities have stagnated during the last one year as buyers have largely kept away from the markets, expecting an imminent drop in prices in the near future. This market expectation has built up considerable real estate inventory during the past 12 months or so. 

According to latest developments, the real estate prices in Mumbai and Delhi are not likely to witness southward movement anytime soon. With the announcement of higher rates of service tax and excise duties in the Union Budget 2012, it is most obvious that homes will be costing more to the customers. Further, the recent amendments in the Development Control Regulations (DCR) will increase costs for builders further by almost 15 per cent. Similarly, the internal committee of the UP Housing and Development Board (UPHDB) has recommended 5 to 25 per cent rise in land prices in various schemes across Uttar Pradesh. As such, areas around Delhi may see a higher rise, according to industry experts. 

According to real estate research firm Liasas Foras, between Q4FY2011 and Q4FY2012, property prices in Delhi have increased by 33 per cent and in Mumbai by 17 per cent. A latest report from CRISIL Research states that there has been seen a 40 per cent dip in sales of new homes since mid-2011 in these markets. This is a situation of low volumes and high prices.

The industry’s prospects are looking bleak due to increased interest rate affecting demand for real estate, along with rising input costs and mounting debt. Developers explain that the rise in construction costs along with tight liquidity is the prime cause of their debt build-up. But interestingly, realty companies are not seemingly keen on repaying the debts. In spite of huge debt burdens on their balance-sheets, these companies are seen paying dividend as high as 67 per cent of net profit this year. Surprisingly, among the dividend paying realty companies, the top four companies with highest debt i.e. DLF, Godrej Properties, Prestige Estates Projects and Puravankara Projects are distributing the highest dividend of 28.33, 21.44, 67.04 and 15.72 per cent of their FY12 net profit to their investors. Further, the board members of Sobha Developers have recommended total dividend worth 22.11 per cent of the total debt on its FY12 balance-sheet.

The most appropriate financial decision of theses debt-trapped companies would be to retain cash and use it to repay their debts. However, the current crisis in the real estate market is not preventing listed companies in the sector from distributing handsome dividends for FY2012 and helping their promoters make a huge income. Paying such huge dividends to its shareholders satisfies various false motives of the companies during times of distress. Paying dividends helps in projecting a good image in front of the investors. This also helps promoters to earn considerable income on their pledged shares. A company such as Oberoi Realty can afford to distribute dividend as it has no debt on its books.

Such false practices in the real estate industry have deteriorated the outlook for the industry. Investors are loosing confidence due to concern over unpleasant corporate governance practices. The diminishing confidence can be seen from the fall in the realty stock prices despite remarkable appreciation in real estate. Nearly all the listed realty stocks are quoting considerably below their issue prices.