Really Sorry State of Real Estate

The Real Estate market has a very strong linkage with the economic growth of a country and any signs of a slowdown in the domestic economy can have a cascading effect on the health of the realty market. The realty sector has been battling issues like higher interest rates that are impacting sales volumes and the highly leveraged balance sheets of companies in this sector have led to erosion of their bottomlines. While the sector was already under stress, the scenario has worsened further with the RBI’s recent policy actions to scrap schemes like 80:20, which helped in generating good cash flows.

The pain in Real Estate continued in the December quarter as well. A subdued economic environment, coupled with higher interest rates, has seen the spending capacity buyers get exhausted. Add to this the reluctance of developers to bring down prices and you have a chicken and egg like situation out there. Various projects across the industry are stuck due to lack of cash flows. Additionally, lower demand has caused an inventory pile up across various cities. In fact, the industry has experienced the highest inventory additions in some of the major cities across India. Further, it is experiencing lower absorption rates over the last few quarters. This has resulted in a higher inventory turnover, increasing the interest burden on the real estate developers.

The bad sentiments surrounding the Real Estate industry continued to dominate during the third quarter of current financial year as well. The industry is expected to face lower sales booking on a sequential basis. Higher inventory days and the net debt burden being on the higher side are factors which are further worsening the situation for them. There are pressures seen on housing segments across various cities in India. However, prices are seen at the same lavel along with stagnant sales volumes. We expect further worsening in the financials of real estate companies having a higher debt burden during the December quarter. However, few selected zero debt companies such as Oberoi Reality can be seen as an investment opportunity after analysing their financials.