The new tide of constructions and developments in the year 2006
put the real estate stocks on fire.
Unitech turned out
to be spearheading other property developers, by an unbelievable
3,000 per cent. Following were CHD Developers and
Ansal Properties
& Infrastructure by 756 per cent and 366 per cent respectively.
Promising such attractive returns, the stocks are encouraging
more and more property developers to run to the markets to raise
money. The Indian Real Estate Giant, DLF Group alone is likely
to raise USD12 billion. Others are standing in queue to get the
nod from the Securities and Exchange Board of India. The total
investments
in real estate stocks would go over USD163.14 billion if all
the planned IPOs hit the marketplace in current year.
Soaring Stock Prices: Corporatisation of the
real estate industry and forthcoming norms stand for the leading
reasons contributing to an increase in demand for real estate
stocks. In addition, the value of the land banks of property developers
can be looked upon as another reason for the same. However, can
these estimates be believed?
Land Banks: Every piece of real estate
is unique and enjoys some advantages, in terms of its location,
building, and financing which helps to determine its actual value.
However, this appears to be the criteria used in the past. Today,
land bank of the real estate companies is what decides valuations.
Other supporting factors include the underlying assumption that
these will be developed in the near future, marking a rise in
the earnings.
Determining the value of a real estate company: Here,
the quality alone does not serve as the determining factor but
also the quality of land banks along with their location. Many
of them enjoy the location in vicinity to special economic
zones (SEZ), which makes them highly preferable. Moreover,
the future of the SEZ development is still foggy in India. And,
the non-SEZ well located land parcels will take too long to develop.
This leads to think about the time land bank will result into
cash flows and the amount. Other facets to ponder over include
margins of the company, current demand, and the supply side push.
Undoubtedly, solving these queries is a difficult task. Then,
there are other more macro worries to think about.
Rising Interest Rates: Release of stringent regulations
for monetary policy of
Reserve Bank of India is accountable
for narrow demand-side. RBI brought about a hike in the reverse
repo rate by 75 basis points till July 2006. In October, it further
increased repo rate by another 25 basis points to 7.25%. Now, it
increased the CRR by 50 basis points effective in two phases. With
home loans rates shooting up, the affordability is sinking down.
Lowering of the residential demand pull may cause an affect over
property rates in approaching time.
And what if prices correct?
Let’s take a look at the revenue and net profit figures
for Unitech
for the last 15 years. They grew at 17.41 per cent and 19.71
per cent per year, respectively, in the last 15 years. This would
give us a clear picture of stock valuations in case the property
prices begin correcting. The company has experienced many up and
downs. This is because the growth in numbers did not come out
to be secular.
Sales
Figure for Unitech Builders During Year 1991-1997 |
Year |
Sales
(In Cr.) |
1991 |
58.80 |
1997 |
267.55 |
Percentage
Increase in Sales During 1991 - 1997: 350% |
Profit
Figure for Unitech Builders During Year 1991-1997 |
Year |
Sales
(In Cr.) |
1991 |
4.65 |
1997 |
18.82 |
Percentage
Increase in Profit During 1991 - 1997: 300% |
