Realty may see sales building up in Q4, but profits could fall

Published: April 24, 2009

India’s real estate companies are expected to see a marginal rise in sequential sales in the fourth quarter ended March 31, 2009, on the back of good demand for their new projects, coming at up to 20% discount to existing market prices. However, their profits may take a hit. On a year-on-year basis, the top five real estate companies are expected to report a 74% decline in topline, according to the estimates of ET Intelligence Group and five brokerage houses.

DLF, India’s largest real estate company, is expected to see a 75% decline in sales in the quarter, while Mumbai-based Orbit Corporation may see a whopping 80% fall in sales. “We expect the fourth quarter to be worse than the previous quarter, as slower sales and absence of new launches begin to get reflected in the financial performance of major real estate players,” said a Motilal Oswal’s study.

The global financial crisis and rising interest rates towards the middle of FY09 halted a five-year real estate boom that started in 2003. The real estate industry, that was growing at a scorching 40% rate, will barely manage a 20% growth.

With the Reserve Bank of India allowing banks to restructure loans to the real estate industry, developers are restructuring their debt to control the interest costs. Although this would improve their cash balance in the near term, the liabilities for the future would only increase.

The developers are also suffering from a fall in rental income, as demand for commercial retail and office property has come down, causing rentals to fall. Recently, Indiabulls Real Estate sold 15,000 square feet (sqf) built-up area in its Lower Parel commercial property in Mumbai at Rs 190 per sqf, at a significant discount to the peak rentals of Rs 300 per sqf in the same area during the boom time.

With a fear of huge inventory pile up gripping them, many developers are taking desperate measures, such as offering longer rent-free periods and slashing deposits, to get rid of unsold stock. They are also paying up property taxes in case of outright sale to counter the slowdown in demand for office space.

As a result of all this, margins on earnings before interest, depreciation, tax and amortisation (EBIDTA) of most real estate companies are expected to remain low despite stringent cost-cutting measures taken by developers. Unitech, Parsvnath and Peninsula Land are, however, expected to register a few basis points improvement in their EBIDTA margins.

High leverage continues to trouble companies across the sector, affecting their net profit margins. DLF and Unitech are expected to report a 78% and 72% decline, respectively, in their net profits in March 2009 quarter compared with the year-ago quarter.

Experts see further cuts in property prices towards the end of the year as buyer confidence continues to decline. “Going down the line, we expect property price cuts to pause, as we see the end of the busy season, and the next round of price cuts is likely around the festive season of October-November,” said an Edelweiss report. It would be a tough task for real estate companies to improve their margins.

Source: Economic Times

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