Bangalore Real Estate Trends

India’s real estate stocks have attractive valuations after plunging 83% from their peak and are likely to rebound within two years, according to Macquarie Group.

India’s real estate industry is grappling with rising borrowing costs, shrinking access to credit and a decline in demand as record prices make homes unaffordable.

The Bombay Stock Exchange’s 14-stock Realty Index has dropped from its peak in January 2008, while the benchmark Sensitive Index surged to a record last November. “This is one of the most bombed out, neglected and despised spaces in Asia,” Mark Matthews, a Singapore-based strategist at Macquarie Group, Australia’s biggest investment bank, said in a phone interview. “It’s in a distressed environment like this that one can find value.”

India’s property index is trading at 1.4 times book value, less than half of the benchmark measure’s 3.4 multiple, according to data compiled by Bloomberg. The country’s developers are expected to face “large-scale distress” amid rising borrowing costs and shrinking access to credit that may force them into fire sales of assets, Knight Frank said.

Indian developers will have to repay Rs 1.8 trillion ($40.4 billion) of debt to state-run banks, private-equity funds and other lenders over the next two to three years, Amit Goenka, national director of capital transactions at the Indian unit of London-based Knight Frank, said on April 21.

Shares of developers that survive will surge several fold over the next few years from where they are, Matthews said. He’s focusing on companies with low debt, high free cash flow, and a good product, he said.

The Realty Index is up 20% from this year’s low on February 24. It fell 0.3% on Tuesday.

Prestige Estates Projects is the brokerage’s top pick in the industry. The Bangalore-based developer, which is in a retail property venture with Singapore’s CapitaMalls Asia, has a low debt-to-equity ratio of 0.3, Matthews said.

India’s property industry is going through a similar phase as Thailand almost two decades ago, Matthews said.

The collapse of the Thai currency in 1997, which marked the start of the Asian financial crisis, showed that the boom had produced excess capacity in residential and commercial property, according to a paper published by Charles Hill, a professor at the University of Washington. By 1997, Bangkok’s property expansion had produced enough excess space to meet its residential and commercial needs for at least five years, according to Hill.

“It’s following the perfect pattern of what happened in Thailand, where companies issued lots and lots of convertible bonds and got lots of cheap overseas financing to build lots of buildings, creating an oversupply,” Matthews said. Weaker companies weren’t able to generate enough revenue to repay debt, leading to defaults and a tightening in lending, he said.

In India, instead of an oversupply, prices have become unaffordable in cities like Mumbai and Delhi, Matthews said. Prices will have to decline or developers won’t be able to sell their projects, he said.
“Some of the Indian companies will not survive — I can almost guarantee it,” he said. “I have seen property cycles in other countries, there are always victims and I think there will be at least two in this one,” he said, declining to name specific companies.

None of the Indian developers have failed so far, which suggests there will probably be more downside, Matthews said.

“We’ve seen that in every single country which has gone through a period where developers get squeezed, run out of working capital and go under, that normally marks the bottom,” he said.

_{Source: TimesofIndia Dt: 28-4-2011}