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How real is your estate?
Vinod K Sharma | December 23, 2006
The current fascination for property stocks reminds me of the runaway boom of the technology stocks in 1998-2000. The mere mention of property in a remote place sends stocks soaring.
Real estate stocks have been chased to the moon this year, making it the latest and the best returning sector for the markets in 2006.
The Sensex is 42 per cent higher this year and the best performing sectoral index is the capital goods index, which has risen 52 per cent. If there was a real estate index, it would have taken the honours of the top performing sector.
But how long will the party last?
What's sure is that the high returns are unlikely to be repeated next year, specially for the same set of stocks that led the rally.
Just before the tech bubble burst, investors were trying to find IT triggers even in companies like Telco and Tisco, where it was speculated that the IT departments of these companies could be merged with the then listed Tata entity, Tata Infotec.
The market seems to have come full circle. Now Infosys is being touted as the best property play. If you take that logic, Tata Iron is even better, as it owns all of Jamshedpur. SAIL will then take the cake as it presides over six townships across the country. Investors need to be on guard against such specious arguments.
The rise in property prices can be attributed to the rise in IT and ITES infrastructure. A foreign real estate advisory firm pegged the contribution of the IT sector to 85 per cent of the new projects. The hyped SEZs may contribute in future but are currently not the driving force.
The demand from ITES, is still strong but going forward, competitive pressure, wage inflation, skill crunch and an appreciating rupee may force ITES to re-look at lease rentals or ammortised expense per future dollar. At that time the real estate sector could feel the heat.
When the first trans-Atlantic flights began in the 1940s, it was thought that airline stocks would be evergreen bets. While the numbers of passengers has increased several times over, airlines have seldom made money. Back home in 2000, IT stocks were favourites. Six years into the new millennium, Wipro pays more tax than the net profit it earned in those heydays, but the stock is down 50 per cent.
The moral of the story is that while businesses may do well, the concerned stocks may not.
Most of the rapid appreciation we have seen happened in companies that acquired land banks years ago. This is a one time appreciation; further appreciation will be gradual. If a company now acquires new land, it will be at market prices. Where is the question of rapid appreciation?
Appreciation, however, could happen in companies where the land value was not discounted earlier. But here investors will need to establish two things. The first is a realistic estimate of free land that is neither being used nor is it likely to. The second is the willingness to sell or develop such land.Investors should look at companies that are doing well in their business; any surplus land is just a bonus. But for existing old property horses, the best may have already been seen.