Unitech is the worst performing Nifty stock of 2008 — the stock has crashed 92 per cent. Peer DLF hasn’t fared too much better, it has fallen 80 per cent while developers such as Parsvnath and Sobha too have lost 90 per cent. All in all, real estate has been the worst performing space last year with the BSE Real Estate Index giving up more than 80 per cent. Can the fundamentals of the sector recover in 2009? Unlikely.
The first half of 2009 is likely to be even tougher than 2008 as demand across segments —commercial, retail and residential continues to remain weak. Already, in 2008-09 so far, almost every developer has reported a fall in leases. According to a report by India Infoline,Unitech has more than 30 per cent vacancy on its portfolio held jointly with Unitech Corporate Parks and has managed to pre-lease only 18 per cent of the anticipated completions over H1CY09. The same report notes that cancellations have outweighed new leases at IBREL’s One Indiabulls Centre, since the REIT listing. Analysts expect rentals to fall further by 10-20 per cent in addition to the drop of 10-15 per cent already seen, given the subdued hiring plans of the IT industry and the high vacancies, coupled with lower rentals, could hurt cash flows, they point out.
According to Jones Lang Lasalle, pan-India grade A office vacancies are expected to rise from 5 per cent in 2007 to 17 per cent in 2009. In the retail space too supply will continue to outstrip demand — malls will be the hardest hit with high vacancies. Moreover, prices for residential property are likely to come down in 2009 and while there is demand, buyers are waiting for realistic prices. Consumers though may refrain from making purchases until fears of job losses and pay cuts recede. What’s worrying the Street is the high level of borrowings that many property firms have.
A recent report by Merrill Lynch noted, “We are increasingly worried about weakening credit ratios and the ability of companies to meet interest and debt obligations.” Merrill Lynch expects sales volumes for the sector to fall 10 per cent and the average selling price to decline 33 per cent in 2009-10 and as a consequence, it expects the average sector earnings to fall 42 per cent in 2009-10.