Realty stocks under pressure on high inventories

Investors are selling real estate stocks on reports that inventories of these companies have piled up due to economic slowdown, higher inflation and job cuts in several sectors.

The BSE Realty Index fell nearly 10 percent in two trading sessions with the major ones like DLF (down 17% percent), Indiabulls Real Estate (down 10 percent) and HDIL (down 12 percent) losing the most.

Reserve Bank of India on Friday hiked repo rate by 25 bps to 7.5 percent is also a major dampener for these companies, which are already facing hard to sell inventories.

Meanwhile, Reserve Bank of India, on September 3 just before D Subbarao ending his term, barred banks from providing upfront housing loans for under-construction projects through innovative schemes termed as "80:20" or "75:25" by the developers. This is really a body blow for cash strapped developers.

According to a report, 'RBI Bans 80:20 Schemes: Correction on the Cards? 'of Jones Lang Lasalle (JLL) report, current inventory of builders in Mumbai is 48 months while in case of Delhi, Bangalore, Chennai and Pune, builders are sitting on an inventory of 23 months, 31 months, 17 months and 14 months, respectively. Generally the comfortable level for holding inventory is of 14-15 months.

JLL indicated that real estate price correction is imminent in markets like Mumbai, Delhi and Bangalore. Inventory levels in leading seven cities in India are much higher than comfortable level 8-10 months ago, the report adds.

Meanwhile, Knight Frank expects correction in mid-income segment in range of 12-18 percent depending on specific projects and builders holding capacity and financial strength.

However, there will be a resistance to cut prices due to the land cost going up now post land acquisition bill, Knight Frank says.

According to a report top builders are sitting on Rs 58000 crore worth of inventories, which could take more than two years to sell; out of which one-third is accounted by DLF.

In an interview to CNBC-TV18, Rajeev Talwar, group executive director of DLF confirmed that sales activity has been very low in certain areas.

According to him, the government needs to give incentive to housing & construction sector. “15,000-17,000 flats will be sold by company over next two-three years,” he adds.

(Posted by Sunil Shankar Matkar)