See 20% cut in pan-India realty prices by Oct: SP Tulsian

SP Tulsian of sptulsian.com sees real estate prices softening by about 30-40%. "Volumes have fallen. I don't think even 20% of CY07 volumes have been met. So, once players start releasing property into the market, prices cannot be held beyond a point. Maybe during Diwali or Dassera, which is around September or October, prices will correct further by about 15-20%. If they keep pace with the volumes that they have targeted, prices could soften by about 30-40%. Ultimately, the consensus is that there would be a fall."

 He does not expect the market to fall by more than 5-6% from here. Investors with a six-eight month horizon should start cherry-picking at these levels, he added.

Excerpts from CNBC-TV18's exclusive interview with SP Tulsian:

Q: We have seen a lot of the real estate stocks losing. But we have also seen a lot of the pseudo real estate plays not doing well. So, while you have the pure real estate plays not doing well, the likes of Century Textiles, Bombay Dyeing and even Alok Industries, which has a real flavour to it, has not been doing well over the last few days. What do you do with investments in such stocks?

A: Firstly, we need to understand the business model of the companies. Bombay Dyeing and Century Textiles are now having their industrial land converted and they are developing this land. So, the cost to the company for the entire piece of land where the ruling price is anywhere between Rs 20,000-30,000 per square feet, but to them the land cost is zero.

In fact yesterday, they showed an Earnings Before Interest and Tax (EBIT) of Rs 140 crore from the real estate division. They are only developing a small piece of land that is to the extent of about 5% in their Dadar and Naigaon properties, in which they have made these kinds of profit. The entire profit is also not booked because it is in construction stage. This is one category where they have not incurred land cost and virtually it will be zero cost assets, which are now being developed by the company into huge realisations.

Coming to the other properties that we have been seeing, the listed players like Omaxe, Parsvnath, DLF, Unitech, and Indiabulls have all been acquiring properties in various parts of the country via various auctions and at current prices, whether it is tier-I, II or III. Property development constitutes over 50% of the cost.

If a company does not have money available for development, which costs about Rs 2,000-4,000 per square feet as development cost, then the pain may aggravate in the form of liquidity. We do not see any selling taking place at the same pace and at the same price on which they have worked out the profitability. So, this is a combination of factors. But one needs to draw a line in between industry, converted realty and pure realty.

Q: One is virtually getting the property business of Century Textiles at a throw away price- should one start looking at all these real estate plays which have got an allied business going along with or you would still stay away from these?

A: Century Textiles have about 40 acres of land at Worli which is a prime locality, where prices are ruling now at anywhere around at Rs 30,000 to Rs 40,000 per sq ft. The total area available for development would be over 50-60 lakh sq ft. So, even if the prices soften and even if I take a conservative realization of Rs 20,000 a sq ft, that would translate into huge value of over Rs 10,000 crore to Rs 12,000 crore even at the scaled price realization. If you knock off Rs 3,000 crore as the construction, you are left with about Rs 8,000 - 9,000 crore as the ultimate value and now you need to discount that with the present value and see the market cap of the company which is now at about Rs 5,000 crore or maybe around close to USD 1 million.

Q: We have been talking to a lot of real estate developers and they haven’t been coming out on concrete numbers on how much the prices may correct. From just a six-month time horizon let’s say end of CY08, how much do you expect the prices to correct given the current situation on interest rates and home loans? What would be your sense in and around the Mumbai region and other key developed markets?

A: It could have corrected at about 10%-20% in different parts of the country. There may have been a 10% softening in Mumbai and around 20% in the NCR region or maybe 20% in Pune, Hyderabad and Chennai. But they have been holding the price. But volumes have fallen and I do not think they have even 20% of the volume that they have been making in CY07. So, once they start releasing the goods or releasing the property into the market, the prices cannot be held beyond a point. Maybe from Diwali or Dassera, which is around September or October, the prices will correct further by about 15% to 20%. If they really want to keep the pace of the volume which they have been in or which they have targeted, the prices could soften by about 30%-40%. But ultimately the consensus is that there would be a fall.

Q: What does one do with all the pseudo SEZ plays? We have seen stocks like Jai Corp, Reliance Industrial Infra for example losing close to 75% or 80% of the marketcap in the last six-months? For somebody who has invested at a higher price, what does one do with such investment?

A: The basic mistake the investors did was, when they invested in these stocks, they had factored in the growth, which was presented by the company over next three-four years. But now with the pessimism going into the market, nobody is prepared to look at the current year performance.

They continue to be a very good growth story but that will not unfolded or be reviled in the next two-years or so and people do not have that kind of patience. I think pure property plays like DLF, Unitech, Omaxe or Parsvnath, have corrected to their abysmally low level. Even for pseudo realty plays, one has to take a call of at least 2-3 years. If one has that kind of horizon, the huge tremendous appreciation in the form of concentrated return can come over 2-3 years. But you need to have a longer time horizon to make real profit from these stocks.

Q: The Sensex and the Nifty are touching fresh lows this afternoon. What's the call of how much more unwinding we will see from here. Does this pose as a buying opportunity now or should we wait on for a bit more before investors can step in?

A: I do not think the market will fall by more than 5-6% from hereon. They have all come at very attractive valuations but negative perception would continue to remain for a couple of months due to the pessimism prevalent caused by political factors, the crude prices, the international markets not responding well, the FII exodus from the Indian market etc. This is value-picking time for investors with a long-term horizon of at least six-eight months.