Monday, February 12, 2007

Property stocks slide as interest rates crawl up

Economic Times
MUMBAI: Fears that property prices could be headed for a meaningful correction seems to be prompting investors in stocks of real estate companies to jump ship. Most realty stocks, which until a couple of months ago were being chased by enthusiastic investors, have shed 10-25% over the past one month.

With interest rates gradually crawling higher, players are worried that demand for property could be hit. Stocks of real estate majors like Mahindra Gesco, DS Kulkarni, Ansal Buildwell and Parsvanath Builders and Peninsula Land have been languishing over the past one month.

Shares of Mahindra Gesco, which closed at Rs 852.65 on January 8, has slid to Rs 645.35 on February 9, down 24%. DS Kulkarni Developers has come down from Rs 387.05 to Rs 304.10 during the considered period, down 20%. Parsvanath Developers slid from Rs 440.25 to Rs 339.20 during the period, down 23%. Peninsula Land, Ansal Buildwell and Sobha Developers have also fallen by around 23%, 22% and 17%, respectively over the past one month.

Said Nikhil Thakker, head research, UTI Securities, "Over the past three years, the housing sector has witnessed a CAGR of 60% to 65% on factors like easy lending rates and accumulated land bank (land purchased at low prices prior to the real estate boom). Hike in lending rates and peaking real estate prices could force the sector towards a slowdown."

Market watchers predict that it would take some time for the sector to regain its lost lustre. The decision to hike interest rates has not gone down well with most builders. "The current real estate boom has largely been contributed by rising income levels and affordable interest rates.

Hike in interest rates and skyrocketing land prices may hit the offtake initially. But we do not see the impact to be very significant,'' said a Mumbai-based builder, adding, "Real estate prices will not impact us as we have sufficient land bank to complete our announced projects. Probably, we will sell our space adding a bit more to the price tag."

Being demand-driven, the realty sector still appears to hold promise with several housing and infrastructure projects coming up at various parts of the country.

"Interest rates on home loans may rise, but this will not change the fact that people need homes. It will only result in people buying homes in less-preferred locations. This will, in turn, force builders to move away from metros to two-tier and three-tier cities.

This trend will automatically negate the concentration of price in a vantage spot," said Mangesh Korgaonker, director general, National Institute of Construction and Manufacturing Research (NICMAR), Pune. According to sector analysts, fresh IPOs by realty companies will pep the sector up occasionally during the days of lull.

"Short-term investors should be careful about sudden dips in stock prices. At current levels, investors, with a long-term view, can start accumulating stocks of companies with good fundamentals. Those who are currently holding realty stocks need not panic; prices will start moving up steadily once the industry factors in raised interest rates and people start booking spaces all over again," said an analyst tracking the sector.

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