In a year when the Sensex scaled new highs and stock prices zoomed across sectors such as IT, auto and banking, scrips of real estate companies failed to attract investors. Realty stocks, which have been trading much below issue prices, are expected to continue the trend, as concerns present in 2010 are likely to stay put in 2011.
Experts and industry observers say that developers remain over-leveraged and demand for businesses other than residential such as commercial, retail (malls), SEZs and office space remain muted. Around 50% of residential units sold in 2010 have been bought over by speculators — big-ticket investors — as sharp price hikes kept end users at bay. A property price bubble and ensuing price fall seems likely in 2011.
Concerns also loom over corporate governance and professionalism in real estate firms. “There is a general feeling that decisions in real estate companies are taken on whims rather on strict professional basis,” said SP Tulsian, a Mumbai-based stockbroker and analyst.
Track record of developers also suggest the same. Before 2007, developers over-leveraged themselves by owning huge land banks. The recession saw developers launch affordable housing projects in 2009 and 2010.
However, bulk sales in these affordable projects to speculators led to price hikes. A price correction in 2011 is likely to put pressure on new launches in commercial and retail segments that have longer gestation period before return on investments can be realised.
Consider this: The highest point of the BSE Realty Index was just a third in 2010 compared to 2007. Stock prices of companies in 2010 was nowhere near 2007 levels — a time when the sector was a favourite of investors.
“Yes these stocks were overpriced during 2006 and 2007. During those years everybody was buying real estate stocks so there was over-ownership. Economic slowdown and subsequent housing loan scam of 2010 hit investor confidence,” Kishor Ostwal, CMD, CNI Research told HT. An industry insider, requesting anonymity, said that today investors seem more discerned and recognise the risks of an over-leveraged and under-managed industry and till transparency issues are addressed, the sector would not find favour with institutional investors.