Reasons for the decline of realty stocks
In India, the realty segment is among the most preferred investment options. However, the stocks of real estate companies have been taking a beating.
For example, the value of investments made within the Bombay Stock Exchange’s (BSE) realty index during October 2009, when it was touching its five-year peak would in today’s date be down by a whopping seventy per cent. This year alone the index crashed 38 per cent.
The slump in realty stocks is credited to the failing financial health of real estate companies. As per real estate analysts of commonfloor, realty developers have gotten caught within a trap of decelerating sale, ambitious expansion, hardening interest rate along with a weakening cash flow.
Reasons for bleak chances of revival:
Stress score: This indicates the capability of business operations to service debt as well as interest obligation. A higher range of ‘stress score’ indicates an improving situation, while a worsening situation is implied by a lower number. The real estate segments stress score has dropped to a five-year low of ‘-132’. During FY10, after RBI issued a huge stimulus package the score was ‘-32’; this directly displays the sector’s worsening financials.
Dry-up of funding options: The key lenders for builders have been banks. An increase in bad loans or non-performing assets (NPAs), the rupee depreciation and a strict monetary policy have resulted in limiting the lending abilities of banks.
Due to these, banks are now shying away from lending to realty companies. Foreign investors and Private-equity funds too aren’t fond of betting on the present realty segment. From nine per cent during FY12, the Foreign Direct Investment (FDI) has plummeted to three per cent in FY14, so far.
High debt: A rise in debt is one of the main issues which has been plaguing the sector. Since FY09, gross debt has increased by 55 per cent. Realty firms defaulting on their debt payments is becoming a commonplace event.
Slowing rupee and high interest rates: While inflation is rising once again, the rupee has been touching record lows. In a departure from its earlier regime of lower interest rates the RBI increased the short-term lending rates to combat these issues. High interest rates and an increase within debt have driven up the interest payments of realty companies to more than Rs 4,000 crore within FY13 from below Rs 2,500 crore during FY09. Thus indicating added cost pressures.
