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This week has been a good one for investors in real estate shares, who had seen their investments lose 30%-55% in value over the past six months in the wake of a number of corruption allegations involving the sector.
While most real estate stocks are now cheaply priced, there are still risks facing the sector and investors should not expect more gains in the near term at least, say analysts.
On Thursday, the Bombay Stock Exchange’s realty sub-index was the biggest gainer and was trading up 2.5%, while the 30-share benchmark Sensex was 0.7% higher in afternoon trade. Unitech Ltd. was up 9.5% at 40.45 rupees ($0.9), Indiabulls Real Estate Ltd. was 4.6% higher at 118.65 rupees ($2.6). DLF Ltd., the only property developer included in the benchmark Sensex, gave up the morning session’s gains and was trading down 0.3% at 233.80 rupees ($5.2). To date, the three stocks have gained between 6% and 11% this week.
The sector has seen a huge sell-off over the past six months but while share prices might now seem attractive, the pain is not over for real estate yet, say analysts. “The off-take (sales) has slowed down in recent weeks and it is likely that developers will have to cut prices in the next few months to boost sales,” says D.D. Sharma, senior vice-president of research at Anand Rathi Financial Services, a Mumbai-based brokerage.
He expects real estate shares to fall again once property developers start cutting home prices.
Another big problem facing the sector is funding. The Reserve Bank of India has increased policy rates eight times since mid-March last year to slow inflation and banks have responded by increasing lending rates.
Most of the large real estate companies have huge levels of debt and will have to fork out more cash as interest as lending rates rise. Ashok Jainani, a Mumbai-based independent investment analyst, says the full impact of higher interest rates will be felt by real estate companies over the next two quarters.
A spate of corruption allegations have also cast a shadow over the sector. In November last year, India’s top federal investigative agency arrested some banking executives for accepting favors to facilitate loans to companies, including some property developers.
The move triggered a massive sell-off in real estate shares, as investors feared banks would become wary of lending to property developers. To be sure, outstanding loans from banks to real estate companies were almost flat at about 1,059 billion rupees between 19 November 2010 and January 28, 2011, according to data from the Reserve Bank of India. Over the same period, loans to home buyers grew 3.1%.

Fuente: India Real Time