Indian Real Estate — Adverse Impact of Credit policy

Indian Real Estate — Adverse Impact of Credit policy
The end of loose credit and monetary policy and the concerns on the real estate sector indicate 1) strong probability of increase in interest rates in 2010 2) reduction in exposure to real estate. We have been concerned of the fragile balance sheet of the real estate companies and we expect the recent announcements in credit policy will increase the pressure on the balance sheet of the real estate companies. Our concerns are further supported by the weak cash flows due to continued weakness in the commercial, retail and luxury housing segments. We maintain our Sell on DLF, Unitech and HDIL and Buy on Puravankara. 1. Adverse impact of RBI increase in provisioning ratio for real estate: The RBI in the credit policy increased the provisioning ratio from 0.4% to 1% today. This is expected to increase pressure on the fragile balance sheet of the real estate companies due to 1) increase in interest rates 2) lower lending to the real estate companies. The companies have been struggling to meet their debt commitments after the sharp decline in the sales volume. The weak cash inflows from sale of affordable housing have maintained pressure on the ability of the companies to service the debt. The increase deposit rates will imply an increase in interest rates for the real estate companies increasing pressure on the cash flow. 2. Interest rates have bottomed out: The stance of RBI in the credit policy showed that it is worried about asset price inflation which implies an increase in the interest rates. Any increase in interest rates is expected to have a impact on the sales volume for the real estate companies leading to increase pressure on earnings, 3. Fragile Balance sheet of real estate companies worries RBI: The RBI Governor has indicated that he is worried of the high level of restructuring by the real estate companies. He indicated that as against average ratio of 4-4.5% of restructured assets to total asset for the entire loan portfolio for banks, the ratio for real estate sector was 14.5%. This supports out view that the real estate companies still have a fragile balance sheet. 4. We reiterate our view of U shaped recovery: We maintain our view of a U due to 1) Weakness still persists in the commercial and retail sector 2) With all the real estate companies focusing on the affordable housing, the prices are expected to remain under pressure. 3) Media reports and anecdotal evidence indicates that investors could be approximately 30-50% of the total sales which implies high risk of cancellations if the prices do not rise. 4) Balance sheet of the real estate companies remains under stress which is supported by RBI as given above. Courtsey : Ambit Research, Ambit Capital Private Limited





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