Real estate companies around the world are feeling the heat of US subprime melt down. The correction in the real estate market is visible in other economies, including India, China, Japan and the UK. Some have tumbled more than the US, with Indian real estate companies witnessing one of the biggest falls. The stock prices of some leading Indian real estate firms have fallen by about 70% to their net asset values (NAVs),which implies that property firms are being valued at justone-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 landbank, overall development opportunities and project execution of a property firm. It is a valuation tool for real estate firms.
Indian property stock prices have dropped as much as 50-70% 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.
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.
Developers in India are trying to lure buyers with freebies and discounts
Consider these freebies:
* Just 5 days to save Rs 3,65,700! At Mantri Park Goregaon, 1BHK & 2 BHK apartments. Consider savings in stamp duty as additional sweetener. Rush! This offer is valid only upto [sic] April 13, 2008 or first 51 customers
* Rs 300 off per square foot only up to 20 April 2008. Lok Housing for Lok Raunak Phase II, Mumbai
* Pay 20 per cent now and 80 per cent on possession. Nahar Amritshakti at Chandivali, Mumbai
* Free modular kitchen, free parking, free interiors, stamp duty relief. New Delhi
* Bangalore-based Orange Properties that promised a Maruti SX4 free for every 1500 sq ft flat at Bannerghatta in India’s silicon city. The apartments were priced at Rs 42 lakh. Considering the SX4 retails for Rs 6-8 lakh, the discount was pretty good.
* Earlier, the group had offered an Audi A4 worth Rs 30 lakh to buyers who booked a villa at its upcoming Magnolia Brooksville project in Bangalore. The villa was on offer at a down payment of Rs 10 lakh.
* The national capital region, where prices have cooled 5 to 10 per cent, is seeing developers quietly offer modular kitchens, free parking, free interiors and even stamp duty relief to attract buyers.
According to recent reports, home sales have dropped 20 to 30 per cent over since last December in Mumbai, Delhi and Bangalore, the same cities in which residential prices had doubled or tripled since 2004.
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