Until volumes return, realty stocks will not react: Experts

ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Oberoi Realty BSE | NSE 30/05/12 Are Mutual Funds betting on Oberoi Realty? Other Stocks in this news Housing Development and Infrastructure | Puravankara Projects | Godrej Properties | Mahindra Lifespace Developers |

The recent upswing in the BSE Realty seems to suggest that investors have regained their appetite for realty. But that may not really be the case, say real estate analysts Aatash Shah of Nomura India and Surajit Pal of Elara Capital, in an exclusive interview with CNBC-TV18's Latha Venkatesh and Anuj Singhal.

Shah says, "Until volumes come back into this market, the stocks are not really going to react in a sustainable manner upwards." He observes that the volumes have gone down significantly in cities like Mumbai, Bangalore, Chennai. He believes that volumes alone are the key to stock performance because the other stigma on corporate governance is likely to remain poor.

"The sector is still nascent, in terms of its exposure to the market, and it will only be a few years from now that you will see corporate governance of the standards that the investors desire," Shah says. Pal also points out that the prices have gone up in the last month or so only on technical calls. He further says, "There is some return on selective stocks, but if I compare risk vis-à-vis return, it is definitely unfavourable." He also picks Oberoi Realty ,  Godrej Property and Mahindra Lifespace

Below is a verbatim transcript of Aatash Shah's and Surajit Pal's discussion with CNBC-TV18. Also watch the accompanying video.

Q: Is it time to pick up some of the realty space, especially those which are unharmed by scams?

Shah: The bounce back of about 15% to 20% in some of the real estate stocks over the last one month has been on the back of more bottom fishing and to an extent reduction in worries on the debt repayment side for some of these companies. Now that the month of March has gone by and we have not really seen any company struggling to refinance or repay its debt obligations, it has eased off some of the concerns in investor's mind.

At the same time, cash flows for these companies are still insufficient to kind of ease off these concerns in a complete manner, going forward. These concerns are likely to come up again over the next few quarters. At this point of time, it does look like the real estate stocks are probably cheap in terms of NAV but I do not see them showing too much of an upside from hereon.

Q: Do you see the stigma attached to corporate governance going away or you think the stocks will have to live with that and in that sense valuations will need to be cut down for these stocks?

Shah: Prices are one thing while the other point is volume. Until volumes come back into this market in terms of the residential side, I do not think that the stocks are really going to react in a sustainable manner upwards.

Volumes have kind of gone down significantly in some cities like Mumbai. In some other cities like Bangalore, Chennai they are pretty much stable where they were last year. So, there is no growth coming in terms of volumes in those cities too. I think that is the key trigger for the stocks to perform from hereon.

In terms of the overall corporate governance issue and the scams - it is something which the investors will have to live with as far as this sector is concerned that corporate governance is likely to remain poor, going forward. Given that the sector is still nascent in terms of its exposure to the market and it will only be a few years from now that you will see corporate governance coming up to the standards which investors would desire.

Q: Would you go out and buy any of the realty space at all - for instance say a space in Bangalore IT sector has done well if anything the demand from the west appears to be stabilizing even improving for the IT companies, so, would you pick any Bangalore boys?

Pal: If you compare the IT company's vis-à-vis their income growth to be converted into buying capacity of the guys in Bangalore, I would say that is basically if you see it is the only the marginal growth or year on year growth.

If you see the basic part of the growth already been lost in IT, if you see the IT companies the yearly growth in their increment it is not very attractive which could actually impulse them into buying something great, in terms of real estate. If you see the inventory level in all this, particularly Mumbai and Delhi, I don't think it has come down quite significantly that it could help us to be optimistic about that the coming demand could drive down the prices.

The prices have gone up since last one month based on the technical call alone. Even if I say there is some return possible on some of the selective stocks, if I compare risk vis-à-vis return, it is definitely unfavourable.

Q: Do you study the NCR market anything you would like to pick up from that particular space, maybe a DLF or even a Unitech, despite the fact that there is a 2G probe attached to that. Would you pick any of those NCR related stocks?

Pal: They are launching their new projects but if you see the location of the project it is far off than Gurgaon, far off than Delhi areas. Therefore, the jurisdiction period for those projects will be much longer than the normal. They wanted to keep their buying rates lower. If I go by their buying rates of the land in Gurgaon or nearby NCR areas, it is pretty high, so it has forced them to go far off and launching over there. Hence, they could book those sales and show some positive trend in account. However, otherwise if you compare the NCR, the crucial one I don't think there is much of change, in terms of demand.

Q: What has been the trend in terms of pricing and volume in the commercial estate market?

Shah: On the commercial side, office space side if you see it kind of differs across various cities again. So, Bangalore has been the best performer as far as office space demand is concerned, in terms of leasing. At the same time, supply in Bangalore seems to be quite stable in terms of the new supply coming into this segment. There is a vacancy of about 14% to 15% in Bangalore's office space market but going forward, if demand remains at this level and we expect it to remain strong over the next 9 to 12 month, I think some part of that over supply will kind of get reduced. One could see increasing rentals in Bangalore from the second half of FY12 onwards.

Mumbai is the worst place as far as office space is concerned with very high vacancy in the region of 20%. There are couple of pockets like Bandra-Kurla Complex which could do reasonably well because not too much of supply is available at this point of time over there. However, some of the sub-urban markets like Andheri-Kurla road or Thane are badly placed, in terms of a lot of over supply over there.

Some of the other places like Gurgaon will still continue to do well, in terms of demand and rentals overall, will see an increase of about 10% from the second half of this year onwards.

Q: Some of the stocks have done somewhat well in the past six months or so - Oberoi Realty, HDIL and even Puravankara did reasonably well in the last few months or so or few weeks. Any of these spaces that you will have a buy call at all?

Pal: If I go by risk return matrix, as an investor I may not be ready to invest in real estate. The biggest problem in real estate, you will find that leading developers are selling some part of the value in cash and they are openly saying that if you are paying this much amount you will not get much of a proper receipt of that. Hence, these things are really concerning when you are in listing areas as a stock. So, from that view point I will invest in a company that has good corporate governance.

I will invest in a company like say Godrej, who already have holding lands for long time because of their legacy. Otherwise, I will be investing in like Oberoi or Mahindra Lifespace who invest in a land, who are not sitting with a high value land. I will invest in a land if the particular project is viable, in terms of if they are capable enough to sell that land or sell that project. Therefore, my three picks are Oberoi, Godrej and Mahindra Lifespace.

Q: Is there a specific buy or sell on any stock?

Shah: At this level I like HDIL, I think the stock has been beaten down quite a lot from the perspective of the fact that the Mumbai airport slum rehabilitation is not moving forward and also on concerns of TDR pricing. It has moved up quite a bit in the last month or so, however, there is still a long way for this stock to go. I like the Bangalore based plays also like Puravankara or Prestige. The market in Bangalore is quite stable in terms of both, the residential and office space side and it does look likely that demand will continue in that market. There is no slowdown over there, it had to move.