Realty companies need a reality check to brighten their Diwali

If one sector really needed Goddess Lakshmi's blessings this Diwali, it is real estate. Despite expectations that the festive season will bring in the much required demand, it seems like the DLFs and Unitechs of India are not in any revival mode.

Two individual reports by Macquarie and Citi say that the festivity euphoria is dampened this year. Going by various estimates, around 40 percent of demand for real estate comes during October to January. And, with the only exception of Bangalore, things are not looking great in Mumbai, Delhi or other big cities.

Reuters

While Mumbai's builders are not yet ready to offer discounts or freebies, price correction seems to be the way to go considering the declining volumes, rising inventories and funding shortfalls, says BNP Paribas. The run rate of volumes in Mumbai are down 50 percent, compared to last year and while the costs keep pinching builders hard, funds are getting scarce. Many developers are now forced to resort to HNIs and NBFCs, whose interest rates can be as high as 20-36 percent. In such a scenario, getting demand back is the key for all developers and experts are convinced that decreasing prices is the only way to go.

Despite the low sales and demand volumes, advertisement and other marketing initiatives have not stopped. And, on the other hand, banks are also trying to push real estate sales, reports Citi.

It says public sector banks like Canara Bank, Punjab and Sind Bank and Dena Bank are roling out festive offers on home loans to get customers back. For example, Canara and Dena Bank have cut home loan interest rates by 50bps or 0.5 percent. Though it is not possible to say how much prices could fall, BNP Paribas expects as much as 20 percent decline in prices to match affordability of buyers.

If one has to play in the real estate sector, it is best to avoid players who could face negative news due to 2G or other such scams. It is also not advisable to go for companies with high debt or poor cashflows, even if the landbank looks impressive.

The BSE realty index has underperformed the BSE Sensex 37 percent in last one year and has fallen 54 percent due to negative news flows and falling demand.

Structurally, one could be bullish about the real estate story of India, but inflation levels do not indicate interest rate cuts any time soon. In that case, one has to be extremely cautious, which is why BNP Paribas still has a neutral view of the sector. It also downgraded DLF from Hold to Reduce. Macquarie recommends names like Phoenix, Prestige and Shobha Developers which investors could look at.