 "Real estate Bill could lead to valuation rerating")
After moving up a bit following the Budget, given the provisions on affordable housing and Real Estate Investment Trusts (or REITs), the BSE Realty Index could not hold onto the gains. The latest trigger - the real estate Bill is positive for consumers and investors in the long term- but is considered to have a negative impact in the near term on the sector, mainly on developers. Nevertheless, there are quite a few companies, which follow good business practices and enjoy strong brand equity and, hence, will be key beneficiaries. Among them are Godrej Properties, Oberoi Realty, Sobha and Prestige Estate.
The negative near-term impact is because, after states adopt the Bill, developers will be required to set aside a certain percentage of collections (70 per cent), make compulsory registration before sale, pay penalty for delay, give more project disclosures and adhere to strict delivery schedules, leading to higher initial regulatory cost for them. Analysts at Motilal Oswal Securities say the measures will result in rise in cost of capital, as surplus cash from project sales will be locked in, while the same is currently used as growth capital. This could also impact margins, as most developers might not have the leeway, given the current market conditions, to pass on the higher regulatory costs to the consumers. Adhidev Chattopadhyay of Elara Capital believes the National Capital Region and the Mumbai Metropolitan Region markets that have an elongated approvals cycle and are dependent on pre-launch sales will be affected more than the southern markets of Bengaluru and Chennai.
Given the new framework, there might be fewer launches, as the sector comes to terms with the legislation and puts in place an effective mechanism to deal with financing, legal and execution challenges. The Bill, however, could lead to consolidation, as smaller players exit, and larger and well-funded players gain market share. Smaller players dependent on investors' money to fund land purchases, which typically comes with a black money component, are expected to cede ground. Strict project completion timelines, better cash flow predictability and shrinking of the black economy, will, according to Parikshit Kandpal of HDFC Securities, result in better shareholder value. This, he says, should help drive down the corporate governance discount plaguing the sector resulting in valuation rerating going ahead. He feels high quality developers stand to benefit from the Bill. The top picks of the brokerage are Oberoi Realty, Sobha, Prestige Estate and DLF.
The negative near-term impact is because, after states adopt the Bill, developers will be required to set aside a certain percentage of collections (70 per cent), make compulsory registration before sale, pay penalty for delay, give more project disclosures and adhere to strict delivery schedules, leading to higher initial regulatory cost for them. Analysts at Motilal Oswal Securities say the measures will result in rise in cost of capital, as surplus cash from project sales will be locked in, while the same is currently used as growth capital. This could also impact margins, as most developers might not have the leeway, given the current market conditions, to pass on the higher regulatory costs to the consumers. Adhidev Chattopadhyay of Elara Capital believes the National Capital Region and the Mumbai Metropolitan Region markets that have an elongated approvals cycle and are dependent on pre-launch sales will be affected more than the southern markets of Bengaluru and Chennai.
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Given the new framework, there might be fewer launches, as the sector comes to terms with the legislation and puts in place an effective mechanism to deal with financing, legal and execution challenges. The Bill, however, could lead to consolidation, as smaller players exit, and larger and well-funded players gain market share. Smaller players dependent on investors' money to fund land purchases, which typically comes with a black money component, are expected to cede ground. Strict project completion timelines, better cash flow predictability and shrinking of the black economy, will, according to Parikshit Kandpal of HDFC Securities, result in better shareholder value. This, he says, should help drive down the corporate governance discount plaguing the sector resulting in valuation rerating going ahead. He feels high quality developers stand to benefit from the Bill. The top picks of the brokerage are Oberoi Realty, Sobha, Prestige Estate and DLF.