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Foundations of realty firms under pressure

Already near their 12-month lows, the shares of real estate companies are likely to face another round of financial bashing from inflation.

india Updated: Jun 22, 2008 20:58 IST
Lalatendu Mishra

Already near their 12-month lows, the shares of real estate companies are likely to face another round of financial bashing from inflation. According to analysts, realty stocks could plunge by 25 per cent shortly, mirroring the negative sentiment about this sector.

Already, since the beginning of the year, the nine listed realty companies have seen their share prices fall by almost 60 per cent on an average, with share prices of the two largest companies, DLF and Unitech, crashing 57 per cent and 66 per cent, respectively.

Apart from inflation, two other factors, rising home loan interest rates and a liquidity crunch for developers,are working as dampeners in a sector that otherwise has high potential demand.

“Realty stocks will be in a bad state,” said VK Sharma, director, Anagram Securities. “Rising inflation is negative for the sector and stocks will have no support level. The stocks will plunge further by 25 per cent.” According to Sharma, those developers that are holding the price line will be forced to let go.

“So far, they are holding on to prices by absorbing the interest on loans taken for projects. This is a time bomb. They cannot do it indefinitely,” Sharma said.

“The compulsion will be much more to cut prices,” he added. Though private equity funding is still flowing, it is headed for select projects and to developers with a good record.

According to Shobhit Agarwal, joint managing director, (capital markets), Jones Lang Lasalle Meghraj, the government’s fiscal measures to curb inflation will intensify the ongoing liquidity crunch. This will impact real estate companies that raised money from debt funds through corporate deposits and commercial paper.

“Developers will face increasing problems,” Agarwal said. “Potential buyers with lower disposable incomes will defer property purchases. These factors will combine to negatively impact an already struggling real estate market.”

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