The real estate sector showed strong revenue growth in the December 2009 quarter with aggregate revenues up 39 per cent over the lows seen in the third quarter of the previous year.
Net profit growth, although subdued (5 per cent year-on-year), turned positive after declining for five consecutive quarters.
Sequential revenue growth (22 per cent) looked up and tied in neatly with data from large mortgage lenders like HDFC, ICICI Bank and SBI, indicating strong disbursal growth of 30 per cent in the quarter and about 25 per cent year-to-date.
The sector's operating profit margins fell. This is because higher costs pinched as construction picked up and there was an increased thrust on affordable housing.
Residential sales provided most of the impetus with developers cutting prices to spur demand.
However, reports indicate that volumes in most cities have declined, except for a few such as Bangalore, reflecting an improvement in outlook in information technology and IT-enabled services sectors, say analysts.
Unitech saw volumes dip 33 per cent sequentially, while Sobha reported a 25 per cent spurt in sales in the first half of 2009-10, analysts say.
Margins will remain under pressure given the cost pressures and focus on affordable housing. However, price hikes in residential property are expected, according to a CLSA report. The risk is that this may dampen the budding demand.
While the markets were fast to anticipate the recovery (Bombay Stock Exchange realty index significantly outperformed the Sensex in the March to October period), worries over monetary tightening and an impending flood of initial public offers (issuances of almost $5 billion) have seen the realty index underperform the Sensex by 13.5 per cent since October 2009.
The underperformance possibly prices in these concerns and current valuations will be attractive if there is any pick-up in residential sales or renewed interest in commercial property.
Till such time, it will pay to pick companies with exposure to markets with improving sales (Mumbai and Bangalore) and a good execution record. The BSE Realty was up 0.88 per cent yesterday even as the Sensex shed 0.75 per cent.
Additional contribution with Sunaina Vasudev and Jitendra Kumar Gupta
