Boom time is certainly a long way off for property developers. A close look at the stock exchange-listed players show how ever-shrinking demand has eroded profit margin
Despite increasing demand and higher property prices in some markets such as Mumbai and New Delhi, India’s real estate market is shrinking. Property developers are reporting a steady decline in their revenues and profits. For one, the dormant markets in south India are not helping the situation. The RBI fiscal measures that have led to increase in both EMIs and interest rates have compounded the situation further. High commodity prices for steel, cement and increasing labour cost have added to the woes.
According to Rajeev Talwar, executive director of India’s largest real estate company, DLF, the industry’s profits are shrinking due to high commodity prices, labour cost and high interest rates on loans, among others. His company’s negative top line growth over the past few years is substantial as sales declined due to negative consumer sentiment on the back of global economic uncertainties and also high interest rates of housing loans.
DLF has seen its net profit decline 79 per cent while net sales dropped 33.75 per cent between 2007-08 and 2010-11. In 2007-08, it reported net profit of Rs 7,821.03 crore on net sales of Rs 14,432.88 crore. A year later, in 2008-09, the company reported net profit of Rs 4,469.6 crore on net sales of Rs 10,035.39 crore. The decline continued in 2009-10 when the company reported net profit of Rs 1,719.64 crore on net sales of Rs 7,422.87 crore. Last year, the company clocked a net profit of Rs 1,639.61 crore on net sales of Rs 9,560.57 crore. The April-September period has seen further erosion in profits and revenues.
Hariprakash Pandey, vice president of Mumbai-based Housing Development and Infrastructure (HDIL) agrees. “There has been an impact this year due to high interest rates, and margins are under pressure. Higher construction cost and delays in government approvals are also impacting the sector,” says Pandey.
His company’s net profit has dropped from Rs 1,409.84 crore in 2007-08 to Rs 822.71 crore in 2010-11, a decline of 41.64 per cent in the past four years. Its net sales dropped 22 per cent in four years to Rs 1,849.99 crore.
According to a recent Knight Frank report, revenues of real estate companies have dropped by 19 per cent and profits have declined by 70 per cent, over the past four financial years, since 2007-08.
The consultancy firm has conducted a financial analysis of 19 leading realty players across the country. These companies have shown a dip in profit mainly on account of high debt, which has increased by 1.5 times while interest outgo has increased by 2.3 times during the four-year period.
Interest costs have risen, and so have debt levels.
Higher construction cost is also eating into their profits.
“Earlier, the construction cost used to be around 25 per cent of the total revenue, which has escalated to more than 45 per cent,” says Talwar. Higher cost automatically translates to lower margins.
J C Sharma, managing director of Sobha Developers, points out that the profitability of developers has been dropping over the past few years.
“After the economic downturn, real estate prices got corrected but input costs did not decline in line with it. But developers had to offer discounts to clear their inventory thus impacting margins.”
In the past four years, Sobha’s net profit fell around 25 per cent to Rs 182.4 crore.
The Knight Frank report said residential prices in most of the cities have either remained steady or increased marginally in the past few quarters. Financial condition or holding capacity of real estate players is one factor that influences the price movement in the market to a great extent.
The report pegs the main cause of concern as high interest rates on debts, which has eroded profitability of developers.
But according to Sharma, high interest rates and debts are not the only reason why profits of real estate players are declining. “Barring a few markets and locations, most others have a huge inventory. But sales volumes have really come down as consumers stay away from purchasing property due to uncertain economic conditions and high interest rates on housing loans,” he says.
Over the past two years, developers have raised huge amounts of debt and equity through private routes.
“But the rising interest rate scenario and dwindling sales volume have put further pressure on their capability to raise funds through these routes,” says Pankaj Kapoor, chief executive officer of Liases Foras, a non-brokerage real estate research firm, based out of Mumbai
Knight Frank warns that promoters who had pledged their shares in lieu of funds have already breached the comfort levels of investors and this may result in losing control over the company to lenders. In order to overcome these challenges, developers have resorted to the last option available to them: Selling-off of assets like land, Transfer of Development Rights (TDR), leased properties and SEZ land. Over the past couple of quarters, many developers have either diluted their
stake or completely sold off some of their assets in order to raise funds and reduce their debt to improve their margins.
DLF sits on a total debt of around Rs 21,000 crore, and the company is trying to bring it down by selling land parcels. As of March 31, Sobha Developers had debt of around Rs 12,000 crore. “Our debt has increased as we have taken a loan in June. We have launched new projects,” says Sharma.
Pandey said HDIL at present is indebted to the tune of about Rs 4,000 crore and the company plans to reduce it by 25-30 per cent within the next one year.
Knight Frank warns that there is a possibility that competition might get aggressive among the builders. Some players, who are not able to raise fresh funds, may resort to reducing prices in their projects in order to meet the short term cash flow requirements. Although, this may not necessarily mean that real estate market will witness a significant fall in prices. But there certainly will be isolated pockets wherein developers may offer huge discounts to existing prices in their projects for the purpose of improving the cash flow situation.
In the past six months, the sector has already witnessed a price correction of 15-20 per cent in residential prices, says Kapoor. This will obviously reduce profits further, say analysts.
Surojit Pal, a Mumbai-based stock analyst who follows the sector religiously, doesn’t believe in a quick recovery for the sector till March 2012. “There aren’t any positive signs,” he adds.
As things go, it certainly looks like the realtors are going to have a tough time ahead before things improve.
