Realty Stocks Tumble: DLF Announces Buyback Amidst Market Gloom
The real estate sector is facing a downturn, evident in the declining stock prices of numerous companies. The BSE Realty Index has experienced a significant drop, shedding over 68.5% from its peak in January 2008. Analysts foresee a continued decline in realty stock valuations due to a market slowdown, increasing input costs, and the unlikely prospect of interest rate reductions.
DLF Initiates Buyback Program
In response to the sharp market correction, industry giant DLF has initiated a share buyback program. DLF's management contends that the current share price does not accurately reflect the inherent value of the company. They have allocated ₹1,100 crore for the buyback at ₹600 per share.
Challenges Facing Developers
Brokerage firm Prabhudas Lilladher points out the predicament faced by real estate developers, stating, “Over the last few months, real estate developers have been caught in a vicious circle of sluggish demand and rising cost of capital. Availability of finance has been a problem with rising cost of debt and drying up of equity funding. There have been instances of developers borrowing at interest rates ranging between 24-36 % against 500% collaterals. The lack of liquidity is likely to impact deliveries, leading to project delays as well as postponement of new launches”. The firm highlights the difficult cycle of low demand and escalating capital costs, compounded by challenges in securing financing. Some developers have resorted to borrowing at exorbitant interest rates, which could lead to project delays and postponement of new ventures.
According to Religare Securities, the realty market has witnessed a slowdown in the total volume of registrations in several cities due to a significant rise in property valuations over the past six to eight months. Consequently, a majority of companies have not met their sales projections for the quarter.
Positive FDI Growth, Yet Concerns Remain
Despite the challenges, foreign direct investment (FDI) has seen substantial growth, with a compounded annual growth rate (CAGR) of 615% between FY2006 and FY2008. Inflows in FY2008 reached ₹8,750 crore, with prominent international players like Blackstone Group, Goldman Sachs, Emmar Properties, Pegasus Realty, Citigroup Property Investors, Lee Kim Tah Holdings, Salim Group, Morgan Stanley, and GE Commercial Finance Real Estate entering the Indian market.
Given the current financial constraints, brokerages maintain a positive outlook on companies possessing substantial cash reserves and secured funding. These companies are better positioned to complete projects as scheduled and capitalize on falling land prices. However, the overall sector outlook remains cautious.
Projected Financial Performance
Religare projects a 35.3% year-over-year increase in DLF's first-quarter net profit, whereas HDIL is anticipated to report a modest growth of 4.1% for the same period. Religare forecasts a 26.5% year-over-year revenue increase for Peninsula Land in the June quarter, with an EBITDA margin of 28.1%. Conversely, Prabhudas Lilladher anticipates Peninsula Land's revenue to grow by 70% year-over-year, with a significantly higher EBITDA margin of 54%. This projected revenue surge is largely attributed to the start of construction at Peninsula Business Park, where 50% of the units have already been pre-sold.