Real estate firms delay plans, shares face the heat

A high-rise building is lit up during construction in Mumbai in this December 22, 2006 file photo. Most Indian developers have hit the brakes on fresh land acquisitions as a slide in the stock market, rise in interest rates and aggressive demands of the private equity investors have limited funding options.

MUMBAI (Reuters) - Most Indian developers have hit the brakes on fresh land acquisitions as a slide in the stock market, rise in interest rates and aggressive demands of the private equity investors have limited funding options.

After five years of boom, real estate firms in India are grappling with tepid sales and cash crunches as inflated property prices and interest rates at near-decade highs scare away buyers.

"The aggression for acquiring land has disappeared. Deal volumes are down 35-40 percent, though prices still haven't moved significantly," said Anuj Puri, who heads property consultant Jones Lang LaSalle Meghraj. "My land division guys are crying."

This is a sharp turnaround from as recent as a year ago, when property firms, flush with funds from public offers or advance bookings, rushed to bid for land parcels, even at distant locations in metros, and in second-tier towns.

Even mid-size developers in India say they hold land reserves of 60-100 million sq ft, sufficient for projects planned in the next 3-4 years. But slumping demand could drive down land prices soon, leading to some distress sales, officials say.

"We have not acquired an inch of land in nine months. I think by December-January, land prices should soften," Vyomesh Shah, Managing Director of Akruti City told Reuters late last month.

Analysts say shortage of cash has also forced developers to put off new project launches and delay work on current projects. Some planned projects may not even materialise.

"Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays," said an analyst at a Mumbai-based brokerage that has revised downward target price on sector stocks by 15-25 percent.

Rising inflation and an expected slowing of the economy will only worsen the situation, say analysts, who are now reviewing their target prices on these stocks.

An analyst at a domestic brokerage said it had recently changed valuation methodology to net-asset-value basis, which had led to some downward revision in target prices. The new method values companies based on current assets rather than future cash flows, he added.

CLSA lowered its net asset value estimate for HDIL by 29 percent, citing higher costs on account of rising interest rates.

STOCKS MELTDOWN

Real estate stocks have been among the worst performers in the Indian stock market, as funding concerns and the sub-prime crisis drove away investors.

Shares of the four largest real estate firms in the country by market capitalisation, DLF, Unitech, Housing Development & Infrastructure and Indiabulls Real Estate, are down by 50-65 percent so far in 2008.

In comparison, the benchmark stock index BSE Sensex has lost 27 percent.

While most real estate firms are still getting by with advance bookings done 18-24 months ago, a sustained lack of demand in the coming quarters may worsen the situation.

"Right now, it is only depletion of paper profits," said Nayan Bavishi of U.K.-based investor Baron Group International, which invests in real estate projects in India and Dubai.

"Wait till after Diwali. Their pockets will get eroded further."