While the subprime crisis has primarily affected the United States, real estate companies across the globe are grappling with its repercussions. Other economies, including India, China, Japan, and the UK, have experienced a more pronounced decline in property firm valuations than that witnessed in the US. Among these, Indian real estate companies are suffering one of the most significant drops, with some major firms trading at approximately 34% below their net asset values (NAVs). This alarming trend suggests that properties are now valued at merely two-thirds of the assets they possess.
According to a report issued by Citigroup, this situation ranks India as the second-most impacted country following Malaysia in the first quarter of 2008 within the major property markets. For context, the property market index in the US is currently only at a 12% discount to its NAV, marking a better performance compared to the global index, which sits at an 18% discount. NAV represents the present value of all anticipated future cash flows for a property firm and takes into account the existing land bank, potential development opportunities, and the overall execution of projects. It serves as a critical valuation tool for real estate firms.
Market analysts have pointed out that this wide discount to NAV indicates a downturn in the Indian property market. Mr. Rupesh Sankhe, an analyst at ICICI Direct, stated, "Historically, when the property market cycle is on an upswing, firms trade at a premium to their NAVs, whereas during a downturn, this trend reverses, leading to shares trading at a discount. Given the high risk associated with real estate stocks, this trend often amplifies."
In stark terms, Indian property stock prices have plummeted by as much as 50-67%, significantly lagging behind the Sensex by 23% in Q1 of 2008. This drastic decline has aggravated the discount to NAVs, which stood at just 1-2% back in November 2007. This shift occurs even with Citigroup's recent analysis lowering the NAVs of Indian property firms by 9-27%.