The inventory buildup is continuing as evidenced by low absorption rates; and there is a deterioration in the mid- to high-end segment with inventory months of 48 (36 in FY13). NCR and Mumbai stand out with
average inventory months of 56 for unit sizes of >INR 3 Crore. NCR and Mumbai have 45-50 months of
unsold stock. This is mainly due to lower absorption rates and higher project launches in the past two years. For Bengaluru, inventory months are not as high as those at NCR and Mumbai, but they are still much higher than the historical average.
In some segments (at current offtake rates), we believe it may take as much as >5 years to offload the current unsold inventory. Most real-estate developers have a large portion of their portfolio in these segments, implying their absorption/operational data is unlikely to improve until they cut prices and / or launch projects in the mid-end segment
The sector’s contingent liabilities now total 43% of net worth, vs 22% in FY09. Also, gearing (including off-balance sheet risks) has increased in the past five years. We believe the increase in contingent liabilities for some companies can be justified by the potential increase in revenue (SOBHA Developers), but for others it should continue to weigh high in the daily operation of the company.
For now, we do not expect REIT listing to be a big game changer, as clarity on regulations and unattractive yields could dampen investor appetite. Also, the proposed real estate regulatory bill could further elongate the execution cycle, leading to lower ROEs and stretched cashflows.
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