2nd of the series
Track2Realty Exclusive
As far as IPOs are concerned, out of the 132 IPOs lined up, the largest number -15 -are from the real estate sector. A number of unlisted developers plan to finance projects and repay debt by raising money from the stock market. However, capital market experts are not expecting any real estate IPO this year due to subdued market conditions.
While the primary market option might not be available to those wanting to invest in real estate companies, one should exercise caution while investing in these stocks in the secondary market as well. In the last 12-18 months (since mid 2010) the BSE Realty Index has been underperforming between 36-47 per cent.
However, there are contradictory signals in the market, too. The sector’s gross debt-equity ratio is likely to reduce to half by FY12 from the levels in FY09, according to a report by Standard Chartered Bank. It attributes this reduction to fund raising activities. The report predicts that valuations of these stocks will improve as these companies are on a stronger footing than in 2008, as most ongoing and soon-to-be-launched projects will contribute to their operating cash flows.
In such a scenario, is it a good time to buy stocks of real estate companies? Experts believe valuations of these stocks are lower and look attractive at this point. In 2012, interest rates may start coming down and some issues in the real estate sector are expected to be addressed. Investors should then focus on companies with good governance norms and attractive valuations. One can choose the ones with low debt, debt-to-equity ratio, strong cash flows, no share pledges and high governance standards.
