Why this run up in realty stocks when fundamentals of the sector have not really changed all that much?
The Q4FY09 performance of most of the realty companies was dismal to say the least. But the market always knows best. Something has changed and that is what is leading to this rise in the realty stocks. A quick look at the possible reasons.
1. The biggest possible factor is the way in which frontline realty companies have managed to tide over their liquidity crisis. For eg: Unitech had raised $325 million through a QIP last month and it has announced today its board has approved raising additional long-term funds by selling securities and issuing share warrants to its founders. DLF promoters raised Rs 3,860 crore by selling about 10% at Rs 230 per share against Rs 1,205 again in January last year. Indiabulls Real Estate plans to raise Rs.2820 crore through share sale to QIPs. There is similar fund raising buzz coming from Sobha Developers. This fund raising of various realty companies will bring down the debt and hence the perception on the street is that probably the worst is over for the realty companies.
2. With the UPA Govt taking center stage, it is now expected that more reforms would come in to give a push to this sector. Expectations are high that RBI might bring in more rate cuts and the Budget is also expected to deliver some measures to prop up demand for realty.
3. The commodity prices have cooled off and this has helped the sector considerably as overall costs have now come down, making it more economical to sell at the given lower rates.
4. Most of the developers have reduced prices and this has helped buoy the mood. There is buying interest, not in the luxury segment but certainly in the affordable housing segment.
5. Banks are not going all over the place, lending to any Tom, Dick and Harry, as they did in the boom times but surely they have started lending more than what they did even three months ago. The screening process has become more stringent but the number of applications from borrowers has certainly gone up.
6. The decision of Maharastra Government to reduce floor space index (FSI) price, the redevelopment plans of dozens of Mhada (Maharashtra Housing & Area Development Authority) residential colonies is expected to get a major boost.
There is no doubt there has been an improvement in the overall sentiments but whether this change in mood will translate into actual buys, one does not yet know. The challenges for the sector remain but maybe, it is this shift in sentiments which will bring it out from the abyss it is currently in.