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Residential Woes

Residential sales continue to remain weak in the real estate sector, even though commercial sales appear to have picked up

Indian real estate developers do not have much to rejoice. Demand has been falling since last year and rates are moderating. What's more, stricter environmental and local regulations and Court directions have caused much heartburn and lost profits. Meanwhile, new residential launches continue to remain weak and interest rates continue to rule high dampening house-buying sentiment among potential buyers. That is pretty much everything that can go wrong with the sector.

The second quarter of FY15 saw residential sales fall by 21 per cent (citi research data). Residential demand has been falling since early 2013 with April-July 2014 seeing a bottoming out for now. Falling demand did not seem to deter realty developers from hiking prices between FY11-13. That seems to be changing now. The latest quarter (Q2) saw residential price jump by five per cent (y-o-y) down from 12-16 per cent jump in prices seen in FY12-13. New residential launches too remained weak - down 40 percent over the previous year and 13 per cent over Q1.

The only space in realty that seems to be doing well for now is commercial property. Commercial sales in key cities were up 45 per cent (y-o-y) in Q2. However, excess supply meant that rentals here remained flattish. New launches in the commercial segment are higher too - up 45 per cent (y-o-y) in some cities.

For the 20 listed realty players in the BSE 500, revenue growth was muted at around 4 per cent (y-o-y). Reported operating earnings were up marginally at 4.6 per cent (y-o-y) but bottomlines declined close to 20 per cent. Average Ebitda margins declined from 43 per cent a year ago to 41 per cent.

Outlook
A sustained recovery will depend on many factors. How the economy goes from here, how job creation levels move, what rates RBI decides in the coming months. Do not expect a quick turnaround in the sector any time soon. Though the BSE Realty Index is up 25 per cent in the last one year, do not expect a higher near-term momentum.

Star performer of the sector
Ashiana Housing
This small tier-2 developer is unlike its peers. Ashiana avoids metros where competition is intense and it does not bet on the land bank game that has sunk many high-profile developers. Instead, it partners with landowners to develop projects in non-metros like Jaipur, Bhiwadi, Halol and Jamshedpur. Ashiana does not have debt burden and its accounting is conservative. However, though operating for more than 30 years now, this is a small-cap stock with intermittent limited daily trading volumes. Buy.

Weakness in residential sales bogs down performance

Company NameSales Growth YOY PAT Growth YoYTTM EPS (G) YoYTTM Ebitda margin (%)D/EROCE
(%)
DLF-0.51%-5.93%-5.99%49.450.775.75
NBCC16.8%17.46%17.46%8.4500
Prestige Estate 1.19%9.05%1.78%34.091.0612.77
Oberoi Realty-24.24%-37.17%-37.17%60.840.0210.76
Ashiana Housing-75.84%-49.74%-49.74%33.060.049.59