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| Home > Knowledge Centre > Leaders Speak > Kanwar Vivek |
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| Mr. Kanwar Vivek - Chief Executive Officer |
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Real Estate sector stocks were one of the best performing stocks in the bourses since the March 2009 low. What are the major reasons that led to the resurgence of the real estate stocks in the bourses?
Like any other segment of the economy, the real estate sector generally performs well during times of economic prosperity. As you are aware the world economy and the Indian economy had been going through an unprecedented economic recession and this resulted in a fall in demand for real estate assets, both residential and commercial. Such conditions adversely affect real estate companies and their performance, and consequent to that, real estate stocks were sold off. The fall in realty prices was in the range of about 20 per cent to 40 per cent varying from city to city . But with signs of economic recovery and some pick up in demand for realty assets, prices have started to move up. Recovery is visible in the residential sector but we may see recovery in the commercial sector with a lag . The positive developments will gradually bring back performance into the markets.
Last 6 months has seen revival in demand for realty assets. Is the worst is over for the industry?
How wide spread the current revival is, how strong and how sustainable is it? It looks like the worst is over for the economy and the markets, and so is the case with real estate sector too. Since the economic revival is supported by fairly strong numbers both in industrial production and manufacturing, it can be stated with a certain amount of confidence that overall economic conditions are set to improve from here. This should support the real estate sector. Sustained recovery in real estate sector would depend on a number of other factors too, like , the level of interest rates , the size of demand growth , the overall environment for the industry like bank funding , extent of pick up in housing , prospects of FDI etc.
Government of India has come out with a draft bill for Real Estate regulatory bill. What are the likely implications on the real estate stocks if the bill is implemented in the current form?
At this point of time there is virtually no regulatory mechanism for real estate business. Therefore, we can say that the industry is probably less organized compared to some other sectors or industries. The proposed regulation will go a long way in making the industry and the sector more organized , and could also bring with it tangible benefits to investors . More than anything else it will bring in greater transparency and efficient price discovery too.
How do you see the current valuation of realty sector stocks in the bourses? Given the recent experiences over the last 12 months, what are the major factors/ points that have to be considered before investing in a realty stocks?
If you look at valuations alone, it looks quite expensive at this point of time. The price earnings ratio in most cases is in the range of 25 – 35. The appreciation in the last six months in the BSE Realty Index is to the tune of 112 per cent compared to 57 per cent in Sensex. Therefore, one needs to go one step further to look at the realty businesses more closely. Companies which have a critical minimum business, for example, entities with large business volumes may be preferred. Again, we need to look at companies with good cash flows as the lack of it could be a problem area for many realty companies. Investment in realty should be basically for the purpose of reasonable diversification of the portfolio. It would also be a good idea to invest into real estate funds, which attempt to capture the benefit of real estate movements in a systematic fashion. |
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