Taking stock of realty

Bavadharini KS

Stocks in the real estate sector, the darlings of investors prior to 2008, have become the most shunned since then. The BSE realty index was among the top losers in the 2008 crash, losing 89 per cent from its peak by the first quarter of 2009. These stocks have not really participated in the market rally since 2009, remaining on the sidelines, even as other sectors zoomed in the Modi-led rally in 2014.

However, winds of change are beginning to blow gently through this sector since early 2017, with the realty index up 124 per cent since the November 2016 low. Despite this recovery, the realty index continues to trade almost 80 per cent below its 2008 peak, even as the Sensex trades 71 per cent above this level.

The woes of the sector were largely on account of the trouble in the residential real estate market. The opaque nature of transactions, coupled with the information asymmetry between buyers and sellers had made developers hike property prices in sought-after areas such as NCR and Gurgaon to unsustainable levels. The steep rise in property prices, especially in the premium segment, made developers focus on this section, resulting in excessive supply here.

As demand evaporated with the economic slowdown, developers were left with large unsold inventory. To address this, project launches slowed, to bring down inventory. But due to low demand for premium properties, especially with developers unwilling to cut back prices, both supply and sales of residential properties slowed. Change in regulations, such as introduction of GST, RERA and the crackdown on black money through demonetisation and the black money Bill further dampened demand.

The residential segment continued to struggle in 2017. While unsold inventory declined 24 per cent compared to the second half of 2015, annual supply was down to about one-fourth of 2015. Demand has also been tepid, down 7 per cent. To add to the troubles, prices have begun falling in 2017 with a weighted average price decline of 3 per cent across cities.

The office space segment has, however, witnessed a steady demand, even as lack of viable office space curtailed supply. Higher transparency in the segment with the presence of informed buyers has helped. Supply in this segment grew 13 per cent year-on-year in the second half of 2017 while average rental yield across seven cities grew 3 per cent.

While some of the larger players such as DLF and Unitech have been hit hard by the residential market meltdown, others with presence in middle and lower-income housing segment or those that diversified into hospitality (hotels), retail (malls and shopping complexes) and office space rental, managed to shore up their bottom-lines better. The Centre’s push to affordable housing further helped players catering to this segment.

For instance, Brigade Enterprises registered a compounded annual growth rate of revenue and profit of 29 and 22 per cent, respectively, between FY14 and FY17. Similarly, Godrej Properties has also delivered revenue and profit growth of 10 and 17 per cent respectively. This is primarily attributed to the presence across diverse residential segments — middle income, premium and luxury, favourable location of the properties and the pricing power due to the credibility enjoyed by the brand.

Here is a closer look at some of the realty players who have managed to keep their head above the water in these difficult times.

Brigade Enterprises

The company derives 75 per cent of its revenue from the real estate sales (residential and commercial), primarily from the Bengaluru market. It managed to weather the industry slowdown over the last three years thanks to increased focus on lease and rental income from office spaces (14 per cent of revenue), hospitality segment (11 per cent of income) and its greater presence in the middle income housing segment. The relatively better demand in the Bengaluru market also helped.

Although the revenue for the nine months ending on December 2017 declined 0.5 per cent y-o-y, the profit registered a strong growth of 38 per cent. The operating margins for the company also improved to 31 per cent from 27 per cent in the nine months ended in FY16. The huge land area, about 510 acres, is a positive and the increasing demand for office spaces will spur rental income growth. The company plans to launch about 25 projects (residential and commercial) in the next one year.

The stock price has, however, run up. At ₹283, it is trading at 19 times its trailing twelve month earnings, higher than the 3-year average of 16 times. The debt equity ratio is 0.8 times.

Oberoi Realty

This Mumbai-based company derives a chunk of its revenue from the hospitality segment (11 per cent) and rental income (17 per cent). Oberoi Realty managed to increase the sale of projects 13 per cent in the nine months to December 2017, compared to the same period the previous year, with sales improving in Maharashtra following implementation of RERA. Favourable location of properties is a major factor that provides pricing power to this player. Rental income growth was also a healthy 21 per cent while revenue from the hospitality segment grew a tepid 2 per cent.

In the last three years, revenue and profit grew at an annual average of 12 and 7 per cent respectively between FY14 and FY17. Revenue and profit in the first three quarters of FY18 was also good at 12 per cent and 14 per cent respectively. The operating margin of the company for the nine months ended December 2017 improved to 56 per cent from 55 per cent last year. The debt equity ratio of the company is 0.3 times. However, at ₹479, the stock is trading at 42 times its trailing twelve months earnings, much higher than the 29 times it has traded in the last three years.

Indiabulls Real Estate

Indiabulls Real Estate, among the largest realty players, is well-diversified in the commercial and residential segment. In the housing segment, it is present across middle, luxury and premium segments, making it resilient to market fluctuations.

The company’s strategic locations in the key markets of Mumbai Metropolitan Region, National Capital Region and benefits from surrounding infrastructure developments such as Mumbai metro and Delhi Dwarka Expressway have aided its growth in the last three years.

The revenue growth for the company during FY14-17 was 10 per cent while the profit registered a growth of 20 per cent. In the nine months ending December 2017, year-on-year sales of residential and commercial projects more than doubled and rental income increased 28 per cent.

However, the margins declined 28 per cent in the nine months ending December 2017, from 49 per cent last year, due to higher cost of land and constructed properties. The huge land bank of the company, about 1,046 acres, will come in handy in the future. Debt is of concern; the debt equity ratio is 1.6 times. At ₹221, the stock trades 25 times its trailing twelve month earnings, far higher than its three-year average of 14 times.

Prestige Estates Projects

The company has nearly 85 per cent of its ongoing projects in Bengaluru, with the rest distributed across Kochi, Chennai and other cities. Among the projects under construction, 83 per cent are residential and 9 per cent commercial (office space).

In the last three years, though the revenue has improved, thanks to diverse price range in projects (middle and premium income category), the profit declined, mainly due to increasing costs. However, in the nine months ended December 2017, the revenue and profit for the company improved 10 per cent and 18 per cent respectively.

About 33 per cent of the company’s upcoming projects would be in commercial while 63 per cent would constitute residential properties. Given the buoyant prospects of the office space, the company’s growth could also be well-balanced, going ahead. The company has debt equity ratio at 0.6 times. At ₹320, the stock trades 44 times its trailing twelve month earnings while the three-year average is 24 times.

Godrej Properties

The location of its properties, strong brand and aggressive launch of new projects in select central and sub-urban areas (24 projects added in the last three years), properties across middle, premium income and affordable housing categories are some of the reasons for the continued growth in Godrej Properties in the last three years. Revenue and profit grew 10 and 17 per cent respectively between FY14 and FY17.

However, in the last nine month ending December 2017, the profit of the company declined 35 per cent year on year due to increase in marketing costs. Revenue grew about 19 per cent for the same period with sale of properties (residential and commercial) contributing about 90 per cent.

The company has a strong pipeline which, coupled with the push towards affordable housing by the Centre, will help in the coming years.

The company has taken on debt in a big way to fund its projects with debt equity ratio at 1.5 times.

This stock is much in demand, trading at PE multiple of 82 times its trailing twelve month earnings, at a steep premium to its three-year average of 45 times.

Also in the running

Besides the above, some other companies have managed to show improvement in their performance in 2017. In the nine months ended December 2017, Sobha, Sunteck Realty and Kolte-Patil Developers have recorded a recovery in revenue and profit, due to the demand pick-up in metro locations and improvement in sale of residential properties in middle and affordable housing segments.

Pune-based Kolte-Patil, with 58 per cent of revenue from the middle-income group, recorded 46 per cent growth in revenue in the nine months ending December 2017. Profit increased about 68 per cent in the same period.

For Sobha too, revenue and profit grew 22 and 33 per cent respectively. For Sunteck Realty, which operates in Mumbai, location of the residential property played a significant role. Its current luxury residential projects are located in areas such as BKC and Andheri.

Going ahead, all three companies intend to focus on the affordable and middle-income housing segment to bolster growth.

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