Correction for whom?

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Sources close to Unitech confirm that “the real estate market saw a correction in 1996-1997 when the prices crashed after going up by 1,000%. In India, investment in residential property is considered safe, so prices of residential properties rise but with inflation and bank rates soaring high there’s bound to be some correction.”

If the words of DLF, the largest real estate player in the Indian realty circle are to be believed, the price correction will not affect the conglomerate at all as the spokesperson from the company asserts, “First of all we don’t believe that there is any slump in the Indian real estate industry and if at all there is, we will not be affected by it at all as we are established as a trustworthy brand among the country.” The healthy interest coverage ratio and position of debt on the balance sheet is making the company so optimistic. Though the realty major faced a minute liquidity crunch when it delayed the Singapore REIT listing, PE players are still more than willing to invest in the company, as they consider it to be a good bet even in the midst of the current downfall in the sector.

Moving over to Parsvnath, as per Pradeep Jain, Chairman, Parsvnath Developers, the correction is not a major hurdle in the growth of the company as he avows, “We can expect correction on the projects offered by small developers, who had unreasonably priced their projects at locations, which are not easily accessible and hence not finding customers.” But he feels that the crunch won’t affect them either, since their projects are appropriately priced and in proximity to customers. On the other hand, if we look at the data of land bank of the company it shows that the company has 16% of their project portfolio devoted to residential and only 2% of their portfolio stands for commercial land. Even though residential projects earn high ROEs due to the negative working capital, with the current interest rate scenario and escalating rates of raw materials, investment made in developing residential land seems to be a loss making proposition at least at this point.

“The construction and infrastructure sector is (also) feeling the heat of rising steel and cement costs as a steep increase in the prices of these two primary inputs, as steel contributes about 15-20% of total cost whereas cement contributes about 10-12.5% of total cost,” adds Jain, citing the 10-12%rise in the prices of Cement and 20-25% steel price increase. This is surely going to challenge their ability to cater to the middle and low income groups.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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