Besides liquidity concerns, sustained under-performance and valuation discount could be attributable to: (a) Delay in launches due to approvals, regulatory hurdles: With the perception that several business models offer developers access to super-normal profit, government organizations have imposed higher surveillance on project approvals. Mumbai has been worst affected with very few new launches over the past 6-9 months as the new government revisits pending proposals.
While regulatory changes, such as change in public parking norms, proposal of 100% premium on certain free of FSI component etc. are steps towards better industry practices, they have created an uncertain regulatory environment resulting in severe delay in launches and execution.
(b) Rising commodity prices hurt margins: An upswing in prices of crucial commodities such as steel, cement and sand have impacted developers' margins, even wiping out most of the profit in several low-priced projects in the mid-income segment.
(c) Sluggish demand: As a confluence of high property prices, high borrowing cost and expectation of price moderation, absorption rates deteriorated across cities despite lower launches. While Mumbai sales declined severely, NCR volume has been mixed bag (Gurgaon: moderate on the back of good response in plotted sales and investors demand and Noida: sluggish due to oversupply concern and issues related to farmers protest on land acquisition). However Bangalore and Chennai markets remained steady with higher end-users demand.
(d) Hurdles for commercial revival: Although revival in commercial vertical in major CBDs has been promising with certain sign of rental strengthening, broad-based recovery is yet to happen due to high vacancy rates and recent concern over IT/ITES growth outlook, which may delay leasing decisions.
(e) Company-specific issues: Real estate companies are up against several headwinds including a CCI-probe of DLF (which can be broadened to other players as it challenges the existing business practice), 2G telecom headwinds (Unitech and DB Realty) and court verdict in favor of farmers on land acquisition in Greater Noida.
Safe Harbor Statement:
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.
Nothing in this article is, or should be construed as, investment advice.
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