‘Waiting for the market to bottom out’

The real estate sector has shown a downward movement since last year due to the falling demand and tight liquidity position for most of the developers. Earlier the developers were evaluated based on their land holdings,however today the focus has shifted to their execution capabilities and liquidity position.

The sector has seen a negative sentiment however it should be noted that not all the developers are facing a liquidity crunch and some still have a high holding capacity.

The current valuations for the realty stocks are today more realistic and could be in an oversold situation in some cases,with lower P/E and P/B ratios (that is price-to-earnings ratio and price-to-book value ratio) compared to the sensex. This is in stark contrast to the previous year when this sector was overvalued.

The advice for the investors is that it would be best to invest in companies with higher annuity income compared to land banks as most of the developers are now delaying their projects.

•What’s the sense you are getting from international investors about the current scenario in India?

Most of the investors are facing a tight liquidity position and those who have the liquidity are waiting on the sidelines waiting for the market to bottom out. We expect the investment activity to pick up towards the end of the year.

Today many deals are available at bargain prices in the developed markets e.g. US,UK and investors would prefer these to investing in India.

•Is it the right time to scale up investment activities in India,as valuations are expected to be down to more realistic levels?

The valuations are more realistic today compared to last year. However there is still a lot of uncertainty about the future upcoming projects and one would have to use a lot of caution when investing in such deals.

Demand is not a problem in India,however affordability is,the supply needs to be introduced at the right price points to meet the demand,only then will the level of transactions pick up.

•However,as debt has become difficult to arrange today due to the reduced lending from the financial institutions,developers are looking for other alternatives.

The RE sector has a long gestation period and would not show results in 2-4 years,the PE funds need to come in for the long term.

This should be a good time for the PE firms to start evaluating the deals

•What according to you are the critical factors in front of the real estate sector?

Financing has become difficult to arrange due to the risk averse behavior of the lending institutions and the rising finance costs. The demand is falling due to the dampening of the expansion plans of many of the companies; the residential sector has also seen a hit due to the falling household affordability.

The completion of the upcoming supply has added to the rising vacancy levels in the commercial market and these are set to rise further from 28 per cent in Q3 2008 to a peak of 43 per cent in Q3 2009.

These factors have forced an increased pressure on the rentals. In this situation we expect to see further corrective actions being taken before moving to a stable state.