Percentage completion rule likely to affect profitability
Despite a tangible revival in demand in the real estate market across the country, profitability of South-based real estate companies will remain subdued in the next quarter as under-construction projects will take some more time to be recognized in the balance sheet of these companies.
As per accounting principles, revenue of an under-construction project is reflected in the book of a company after a certain degree of completion of the project. Usually, most companies follow the 30 per cent completion trigger to calculate the revenue on their balance sheet, which is precisely the reason why these real estate companies are still lying in anxious wait to see their profit curves.
However, it is believed that although gradual, profitability of companies would witness a rising trend as new projects launched by companies will certainly generate a growth in demand. However, this might take another one to two quarters to reflect completely on the sales figures of the companies.
Many real estate companies in south India have registered a flat growth or have seen a dip in their net profit during the second quarter of the present financial year. Those companies which have posted higher profitability figures have done so on the back of land monetization than on higher core earnings. During the economic slowdown, many developers had stopped launching new projects. With the revival in the economy, new projects are being launched and those will take time to reflect in the balance sheet.
However, the accounting principle would not have a profound impact on some of the real estate developers who have been growing steadily & have already shown growth in the last quarter. Experts believe that on the backdrop of a robust demand in real estate, the upcoming quarters would register better revenue and profit growth for realtors.