India: No Country For Buying Land

India Real Estate: Shaky Foundation

Collapse of REIT listings in Singapore will drain liquidity of Developers, while Higher Interest rates at home and possibility of extending IT benefits to existing Software Technology Parks could seriously under-mine developers banking on demand from IT/ITES entities and put a seal on new SEZ development.

 

 

With absorption in the residential segment showing serious signs of slowdown, developers were seeking to monetise their commercial assets through overseas REITs to maintain their growth momentum. However, the recent fall and the impending credit squeeze in the Singapore REIT market has put paid to their plans.

 

The absence of tax breaks to domestic REITs in the current budget has added to the uncertainty. A potential slowdown in the IT/ITES industry on the back of the sub-prime crisis in the US, coupled with the Finance Ministry's indication that the STPI scheme could be extended beyond FY09, means real estate companies have little on which to base their office expansion plans.

 

Though large developers have headroom to leverage their balance sheet, the global widening of credit spreads could translate into increased borrowing costs. In our opinion, the 'build and lease' model and ambitious execution pipelines of many developers could come under threat in the event of a prolonged slowdown in demand.

 

We continue to prefer DLF and Indiabulls Real Estate on the strength of their balance sheets, comfortable liquidity positions and relatively low unpaid land costs.

 

No cheer for the residential segment in the budget:

 

With residential volumes in NCR and Bangalore 30-40% below CY06 levels, developers were banking on lower interest rates to boost demand. However, that seems unlikely over the medium term, as containing inflation would be the central bank's top priority during this election year.

 

Uncertainty around the timeframe of Singapore REIT listing:

 

The S-REIT index has declined by 25% from its peak in July 2007, with six out of the 20 REITs trading at discounts to the underlying value of their respective properties. The subprime-led global liquidity tightening has pushed up their refinancing costs. This has created uncertainty around real estate

developers' plans to monetise their commercial assets.

 

Uncertain growth outlook of IT/ITES segment not helping:

 

The IT/ITES segment remains exposed to the sub-prime slowdown. The Finance Ministry's indication that STPI could be extended beyond FY09 has put a cloud on IT/ITES companies' office space expansion plans.

 

Cash is king: With stock prices having corrected significantly and debt likely to be more expensive, we prefer DLF and Indiabulls Real Estate on the strength of their balance sheets, comfortable liquidity and manageable unpaid land costs.