Experts see property prices in Mumbai holding

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Eye auto, banks, cements stks; avoid realty: Kotak Secs Baliga negative on realty space Kotak Sec bullish on auto & banks; cautious on realty stks ALSO READ See latest News about HDIL See previous management interviews See what other Experts & Brokerages are saying about HDIL BSE | NSE 09/02/12

Sarang Wadhawan , MD , HDIL , expects real estate prices to hold in Mumbai. He said volumes have dropped in the real estate sector. "However, no price correction is seen. We follow different sales models, so are less impacted by the slowdown."

Gaurav Pathak , Analyst, ICICI Securities , said the price correction is expected least in Mumbai. He said it is difficult to figure out the bottom for real estate stocks. "Price to book value will be a key parameter for valuation."

 

According to Pathak, companies with low land cost will do well. "We expect a slowdown in execution. Funding is a concern for the realty sector. We expect execution to drop to 50% of what was initially indicated by companies."

 

Here is a verbatim transcript of the exclusive interview with Sarang Wadhawan and Gaurav Pathak on CNBC-TV18. Also see the accompanying video.

 

Q: Do you see any stock market respite for these stocks as they have fallen so much? Is it value or do you just stay out because it's a falling knife?

 

Pathak: The sector outlook continues to remain cautious. If you look at operating parameters, the price correction has not happened to the extent that it should rightly happen. We expect more than 20% price correction purely from a base case price point. So, operating parameters continue to look bad. In terms of stock price correction, it is difficult to figure out the bottom, but the price to book value is a parameter for people to look at and figure out a comfortable zone to buy a stock.

 

Q: In the last few months, reports suggest that the entire realty space not only in Mumbai but even outside has come to a major standstill in this tug of war between the buyers and real estate developers like your self. At the end of six months, are you going to see major price cuts, are you getting squeezed currently or do you sense that you will be able to hold out for the next 6-12 months in this lean patch?

 

Wadahwan: The price cuts haven't happened as yet. What we have seen is that volumes have dropped a little bit. You have to understand that every developer is different. HDIL has different models of sale. We have TDR or FSI sale, sell to other developers, and are one of the largest slum rehabilitation companies in India. We are not dependent on just one model which is let's say residential flats to consumers. So, it really doesn't affect us to that extent.

 

Q: Would you just think it's a matter of time before it will start impacting even solid strong holds like Mumbai?

 

Wadhawan: If you are talking about the wealth created by the stock market, then definitely yes there has been erosion of wealth. But we do not look at that parameter. For us, Mumbai is still holding strong. We think prices have still not corrected and do expect prices to hold on unless some developers do face a crunch. We expect the market to hold on a little bit. Volumes may have dropped, but at the same time developers are still out in the market for doing TDR and executing their projects. We are very confident that we will be able to tide through this.

 

Q: What kind of numbers are you getting in terms of real estate price falls and what is your own view about the Mumbai market?

 

Pathak: The correction hasn't been to the extent that analysts or investors are talking about. The reason being that it's sticky and not a very liquid market; and the transaction costs are very high, so it takes its own natural time for the prices to come down. The key call is for larger developers for whom a big component of their sales was selling large commercial blocks to end customers, corporates, or financial institutions. In the tight liquidity scenario, that might not happen. If that's the case, then earnings could come at a risk. In the residential front if that's the case, then earnings could come at a risk. On the mid-income housing front post a 20% kind of a price correction from a base case, I think genuine demand would start to come back into the system.

 

Q: Are you expecting the Mumbai realty pack also to be hit shortly?

 

Phatak: Mumbai is one market where along with other factors affordability is a question. But supply is not that big a question, because it's a land starved market. So from a price correction point of view, it would be the least in Mumbai vis-à-vis the other guys. But at the end of the day, there has to be price correction at each and every geography. The key component would be input costs. Realty companies having a business model of low land cost would continue to do good in today's tough times. Eventually, developers with a lower leverage and strong balance sheets would look too tight through this period rather than going aggressive on sales.

 

Q: Before this correction a lot of real estate developers have come out very aggressive on capex plans. Do you sense that these plans will continue and where do you sense funding will come from?

 

Phatak: In terms of execution, there definitely has to be a slowdown in execution. Funding has become a concern even though G-Sec yields are starting to come down, but loans to home builders and real estate developers have not actually come down. Banks are still conservative in terms of their exposure to the reality sector, so funding has definitely become a concern. FII and FDI flows have both slowed down significantly to the sector, so funding is a key concern which would definitely impact execution. Executions would reduce by half to what their plans were earlier. On a steady state basis, larger developers like DLF, Unitech, and HDIL would do something in the range of 30-40 million sq ft and the smaller and midcap developers would be in the range of 10-20 million sq ft annually.