Just before the stock market crash of 2008, the insatiable hunger to own real estate stocks lifted their prices and market capitalization beyond all reasonably accepted limits.
Real Estate Stock Prices – 1St Jan 2008
(Price per share in Rs.)
As the stock markets crashed in 2008-09, real estate stocks were hit the worst, primarily because of the amount of debt they had accumulated to satisfy market’s hunger for investment in property. Analysts were unanimous that companies had leveraged themselves beyond comfortable levels and had created huge oversupply of both residential and commercial projects. A lot of those projects were (and arguably, still are) unlikely to be sold at their intended prices, if at all they would be sold.
Investors literally deserted their holdings.
Real Estate Stock Prices – 1st Jan 2009
(Price per share in Rs.)
Naturally, whatever money was realized, went to other investment avenues.
So . . . . . . where were people investing over the last 5-7 years, i.e. post the 2008 crash?
Surprisingly, it was Real Estate!
In fact a lot of those who sold shares in these companies went ahead and invested in property being constructed by these very companies. Those who bought Unitech @ Rs. 500 a share, no longer wanted it at Rs 20 a share. Instead they wanted to invest in an apartment constructed by Unitech @ Rs. 3 Cr, something which they did not want to own until a few years earlier (when the same apartment was available @ Rs. 1 Cr). This helped these companies in substantially reducing the debt on their books.
Consolidated debt (in Rs. Cr.)
The Big Question – Should You Start Buying Real Estate Stocks?
Some of these stocks are available at more than 70-80% discount from their peaks. This, despite the fact that property prices have gone through the roof over the last 5-7 years. Further, if you look at the debt level for these companies, it has come down substantially. What then is the reason for not owning real estate stocks?
- Oversupply – Second and third home buyers fuelled most of the demand for real estate projects over the past few years. This resulted in a massive pile up of unsold projects. Surely, the demand exists but it is severely outstripped by supply. In such situation, fresh construction slows down and builder companies hold on to their existing inventory of unsold projects. The potential buyer on the other hand keeps waiting for a correction. This could potentially go on for many years until the demand and supply balance out.
While oversupply remains a concern, if you believe that Indian population will keep growing and that the Indian economy will keep expanding, then there should be little debate on why the real estate sector will not outperform.
- Use of black money – Buyers use their unaccounted (black) money to invest in property. Typically, they pay part of the total consideration using tax paid money and get the sale deed registered for a lesser amount to save on registration charges. The amount over and above the amount mentioned in the sale deed is paid in cash to the builder.
The argument is that this is beneficial only for the builder companies who amass a large amount of unaccounted money. In reality, a lot of expenditure incurred in this sector is also made using unaccounted money. Overall, this problem is (or rather should be) taken care of in the valuations. ROE and P/E numbers for prior periods should set a realistic benchmark for future. Currently, real estate stocks across the board are available at a discount in terms of their historic valuations.
- Fear – Besides the massive crash of 2008-09, there are other reasons which have created a fear around investing in real estate stocks. Some popular views include – these companies are all fraud. Real estate companies don’t do well for investors. Real estate companies will go bankrupt. Builders are unethical people (this is the most interesting one for me, even if this is true, how is ethics and profitability related?) etc.
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