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US Housing Crisis Melts Indian Realty Valuations
Saturday, April 19, 2008

The sub prime crisis may have struck in the US, but real estate companies around the world are feeling the heat. The meltdown in property firms' valuations in other economies, including India, China, Japan and the UK, has surpassed that of the US with Indian real estate companies witnessing one of the biggest falls. Some leading Indian real estate firms are trading at about 34% discount to their net asset values (Naves), which implies that property firms are being valued at just two-thirds of the assets they hold.

This makes India the second-most affected nation after Malaysia in the first quarter of 2008 among key property markets, according to a Citigroup report. Interestingly, in the US, the property market index is trading at just 12% discount to its NAV. Its performance is even better than the global index, which is ruling at an 18% discount. NAV is the present discounted value of all future cash flows of a property firm. It factors in the existing land bank, overall development opportunities and project execution of a property firm. It is a valuation tool for real estate firms.

Analysts say the discount to NAV shows that the Indian property market is on a downswing. According to ICICI Direct real estate analyst Rupesh Sankhe, "Historically, when the property market cycle is on an upswing, firm's trade at a premium to their NAVs, and during a downturn, this tends to get reversed with shares trading at a discount. Since real estate stocks are high risk, the trend gets amplified."

Indian property stock prices have dropped as much as 50-67% and underperformed the Sensex by 23% in the first quarter of 2008. Such a sharp fall has widened the discount to their NAVs, which was just 1-2% in November '07. This is despite the fact that Citigroup has lowered the NAVs of Indian property firms by 9-27% in its analysis. Real estate consultancy firm Cushman & Wakefield joint managing director Sanjay Dutt says high interest rates have made property firms with high debt exposure prone to rapid erosion of corporate valuations.

He added that each segment of the domestic real estate sector is facing problems: "With the exit of speculators from the residential market, the transaction volume is down by almost 40%. Secondly, a large part of the IT & ITES space is occupied by US and Europe-based MNCs, but in the first quarter of this year, a majority of them didn't commit to any space and we don't expect it to change in the second quarter either. In the office space, rates have started softening due to new supplies. Majority of the mall developers are also hit as cost of servicing debt has gone up and private equity funds are being cautious in investing in the sector."

Valuations in the Indian real estate sector had peaked in January, when the benchmark stock market index, Sensex, also hit an all-time high, with realty stocks trading at over 20% premium to their NAVs. After the stock market crash, DLF, Unitech and Purvankara traded at a discount of 18%, 26%, and 49%, respectively, to their NAVs. Regionwise, Malaysia fared worse than India with property stocks here trading at a marginally higher discount compared to India. The correction in Chinese property stocks seems to be the deepest since November last year. Chinese property stocks are trading at a discount of 27% to their NAVs compared to a premium of 5% in November. The US, in fact, saw marginal reduction in discount since November '07.

Some risks appear to be priced in and the valuations seem attractive, but there could be more volatility ahead, says the Citigroup report, pointing out that the sector is highly vulnerable to capital flows as risk appetite tapers off.

In the same locality, Jaypee Green, a township by the Jaypee Group, also boasts of luxury villas and high-rise apartments built around Greg Norman-designed 18-hole golf course.

Omaxe is also developing a Golf Theme Township estimated at Rs.18 billion in Raipur, the capital of Chhattisgarh.

Developers attribute the trend to growing passion for golf among the elites.

"Golf is not just a game but it's a symbol of urban upper class lifestyle," Pramod K. Magu, executive vice president, Unitech.

"So from the top brass of the corporate world to those who aspire to arrive in life, everyone finds residences built around the golf course an ideal abode," Magu added.

The fact that the project caters to an exclusive segment of society goes in favor of the developers.

"Golf home projects are exclusive projects. Slight slumps in the market that generally slow down the middle housing segments usually do not affect these projects, as the buyer is exclusive and very selective about the property," Magu avers.

And the trend is fast spreading from metros to emerging cities.

For example, Ansal API's Sushant Golf City Lucknow is spread over 2,000 acres on the outskirts of the Uttar Pradesh capital.

"Earlier golf was restricted to a select group, but it has grown popular over the years with many middle level executives and business class taking active interest in the game," Banerjee said.

That is the reason Ansal API are proposing a Royal Palms Golf and Country Club in Lucknow that will offer residents the services of golf trainers and coaches.

Even Sahara is providing a golf academy to impart professional golf training in its Amby Valley project built around an 18-hole golf course at Lonavala, 96 km from Mumbai.



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