Still, things aren't likely to get better, at least for now. A Dow Jones Newswires poll of 10 analysts expects DLF to post a consolidated net profit of 4.74 billion rupees ($104 million) on sales of 23.69 billion rupees for the quarter. That is a mere 1.3% and 10% rise, respectively, from a year earlier. Compare that with 22% rise in profits and a 25% rise in sales, on average, for 14 of the 30 benchmark Sensex companies that have already declared earnings for the October-December period, and you get the picture.
Third-quarter earnings reports from Honda and Sony, as well as an interest-rate decision from Australia, China PMI and industrial output data from Japan will be the highlights of a week in which many regional markets will close for the Lunar New Year holiday. MarketWatch's Lisa Twaronite in Tokyo looks at the week ahead.
A string of negative news flow over the past year, combined with the unwillingness of developers to drop rates to the zone where genuine demand exists, already reflects in stock prices. The Bombay Stock Exchange's 15-stock Realty Index has underperformed all the other sectoral indices — over the past week, month, quarter and the year. It has underperformed the benchmark Sensex by 29% over the past three months, and by more than 47% over the past 12 months.
Consistently sticky inflation has prompted the Reserve Bank of India to raise policy rates seven times over the past year. It has raised the repurchase rate by 175 basis points and the reverse-repurchase rate by 225 basis points — with the latest hike coming last week. To enable quicker transmission of policy to the market and keep liquidity tight, the country's central bank also raised the cash reserve ratio by 100 basis points over the same time period.
Added to the higher cost of mortgages, volumes have been on the decline. Mumbai — the country's largest and most expensive real-estate market — continues to be a laggard, with volumes declining around 50% from the peak of May 2009 on high prices and dampened buyer sentiment.
Consequently, inventory levels remain at elevated levels, prompting analysts to believe that a correction in prices is imminent.
"At current affordability levels and with mortgage rates expected to go up, we see hardly any room left for further price increases and expect disappointment on volumes to continue in the fiscal year beginning April 1, unless property prices correct by 10%-30%," Credit Suisse said in a recent note.
Developers have disappointed investors on multiple grounds with respect to earnings growth, cash-flow generation, pre-sale volumes, debt reduction and monetization of non-core assets, despite a favorable property market over the past 18 months, it said. In an environment of tightening liquidity, several property developers have reported negative cash flows, while other have disappointed expectations despite managing to generate positive cash flows.
"If pre-sale volumes see a slowdown in the next fiscal year, cash flows are unlikely to see a significant improvement from the current levels. Further, owing to liquidity tightening, developers are expected to face difficulties in funding their construction spend and interest expense," the Credit Suisse note said.
Adding to developers' woes is a debt pile that will be harder to restructure or refinance, given the increased scrutiny that these transactions will come under after a scam involving real-estate companies paying bribes to get loans from state-run banks surfaced last November.
"This will result in delays in refinancing and will push up the higher cost of borrowing. The cascading negative effect will be on execution of the development land bank. That in turn will generate more upward pressure on real-estate firms' debt-to-equity levels," Mumbai-based Ambit Capital said.
The central bank's recent decision to limit loans at 80% of property prices and its move to discourage loans that charge lower interest rates in the initial years of the loan term are also likely to weigh on sales in the medium term. Last week, in an unprecedented move, it also asked banks to slow lending to prevent any build-up of demand-side inflationary pressures. Non-food credit growth grew by 24.4% in 2010, much above the central bank's indicative projection of 20%.
This will further dent both mortgage lending and lending to real-estate companies, putting paid to the strong volume growth being guided by most developers.
The real-estate sector has relied heavily on bank funding, evident from the 1 trillion rupees in outstanding property loans. The moratorium period on real-estate and other loans that were restructured by banks during March-June 2009 is coming to an end over the next one or two quarters, putting additional repayment pressures on developers.
Some developers have been raising capital at the project level by selling stakes to private-equity developers in the absence of other forms of capital, but this is only for new projects.
Rising commodity prices will only add to cost pressures, eating on margins that are already being squeezed. All these headwinds leave little choice for developers but to bring down prices to more realistic levels. Perhaps that is the cue that investors are waiting for.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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