RAJESH GAJRA WITH GURBIR SINGH
The recent swings in the equity markets rattled Purvankara Projects’ plans to go public and have shaken investor confidence in the realty market. The Bangalore-based realty firm had wanted to raise Rs 1,130 crore when its stock was valued in the Rs 500-525 band. But as the stockmarket fell last week, Purvankara was forced to revise its offer price band to Rs 400-450, which allowed it to raise just Rs 898 crore.
But retail investors gave the issue a wide berth, leaving institutional buyers to subscribe to the company’s initial public offering (IPO). The same happened with the recent DLF IPO and this raises a question: Are we seeing a revision in the appetite for real estate stocks?
Yes. Real estate is a cyclical industry, and like all cyclical industries it is very sensitive to changes in interest rates; any increases in rates make prospective home owners postpone buying decisions. Given the Reserve Bank of India (RBI) is still seen to be committed to raising interest rates, this is depressing market sentiment as 70-80 per cent of the real estate market is residential.
Since realty markets in Bangalore and in north and central India have seen a 10-15 per cent correction, there is a growing perception that there is a glut in the supply of space and this is pulling real estate stocks southward.
The Purvankara IPO has also raised questions about the way realty companies are valuing themselves. Since demand forecasting in the real estate business varies widely, every real estate company needs to have a large land bank.
A realty company’s stock price and valuation is based on its land bank the same way other companies base theirs on their net asset value (NAV).
What’s troubling is that several realty companies do not appear to actually hold titles to the land they claim is part of their land bank. Purvankara’s lower stock price seems like a more accurate reflection of its real NAV, and as long as there is no clarity on land bank valuations, realty stocks will suffer.
And just last year the global outlook on Indian real estate was extremely upbeat:
Indian Real Estate
Even here rising interest rates were a concern, but the entry of global real estate funds was supposed to ride over such difficulties. What will happen if there are real estate jitters in the US following the sub-prime lending fiasco?
