Slowdown, falling market demolish real estate stocks

3 Jun, 2008, 0402 hrs IST,Sanjeev Choudhary, TNN

With increasing evidence of a slowdown in the realty sector, rising input costs and little chances of interest rate softening, realty may see further dip.

The uncertainty in the capital market has hit realty stocks the hardest.

The BSE realty index is the worst performer this year, having shed 51% of its 52-week peak reached in January.

With increasing evidence of a slowdown in the realty sector, rising input costs and little chances of interest rate softening, experts feel realty stocks may see further dip in valuations.

The BSE benchmark index Sensex has shed 24% since January while power stocks, which had a fantastic rally before the January crash, have lost 42% of their 52-week peak. Other major losers include bank (41%), consumer durables (41%), capital goods (39%), PSU (39%) and oil and gas index (28%).

"Realty and power stocks had run quite high in 2007, and that’s why when they started coming down, the fall was more pronounced," says Centrum Capital research head Harendra Kumar.

Investors were factoring in higher profits, but now with the sector in the throes of a slowdown, they are scaling down their expectations leading to fall in prices, he added.

The country’s largest property firm DLF’s scrip lost 54% while Unitech shed 64% from its peak. The scrips of Delhi-based Parsvnath and Omaxe have lost 68% each since January.

Real estate sector is seeing a major slowdown in the sales volume in most markets of the country. The speculators have exited the market and Mumbai and NCR, the biggest real estate markets in the country, are seeing subdued sales.

In Gurgaon and Noida, which had seen prices almost treble in four years, sales are down 70%, leading to a price correction of 10-20%. Centrum’s Harendra Kumar says if the negative newsflow continues for the realty sector, the scrips may see a further dip.

"The scenario has changed since end-2007 when the consumers expected interest rates to soften. We are faced with such a high inflation rate that interest rates are unlikely to come down for 6-9 months," says Angel Broking research head Hitesh Agrawal, adding the demand for real estate will remain subdued at such a high interest rate.

"Rising steel and cement prices have increased the input cost for developers while credit has been tightening with banks becoming selective in lending," says Mr Agrawal.

VIA:E.T