Only a sustained fall will hit realty IPOs

Real estate majors saw their stock prices drop from 3-6% on Monday, not much compared to sectors like banking that saw even sharper declines. However, unlike banks, a number of property developers have lined up for public issues. Also, during the earlier corrections, real estate stocks have seen far more fluctuations when the overall outlook on the market was sour.

The prevailing wisdom is that a falling stock market will not impact property prices. The impact was restricted to the top-end during earlier corrections, say industry sources. However, a sustained correction could put a spanner in the listing plans of various developers planning to raise capital. Market participants feel that this is not such a major risk now, as the real estate business is much better understood. Indian real estate developers are planning to raise close to Rs 20,000 crore over the next year – this include all forms of funding including international listings.

The linkage between stock market and property market only comes at the top end, this includes properties of Rs 1 crore and above. The number of transactions at this level had fallen after the market correction in May this year. This was partly due to the correction in the stock market, according to industry sources.

Real estate prices had run up almost 30-40% in the preceding months and interest rates had also increased in that period – this led many potential buyers to postpone their purchases. However, since the slowdown coincided with the monsoon, which is a lean season, most builders chose to hold on to the price levels. The market picked up again at the time of Navratri.

Real estate stocks are among the most volatile. For instance, Unitech rose from Rs 188 in the beginning of the year to Rs 986 by mid-May. In the subsequent correction, the stock again dropped down to Rs 314.5 by July. In the beginning of December, the stock touched Rs 1,100. Another heavyweight Mahindra Gesco rose from Rs 400.65 on March 17 to Rs 1,288 on May 17. The stock had dropped to below Rs 400 over the next four weeks. By the end of November, Gesco had again crossed the Rs 1,000 mark.

However, such fluctuations may be a thing of past, feels a source in the investment banking sector. “There is greater conviction now than was there earlier and the sector is understood much better than in the past. The earlier jumps in stocks have had a small element of speculation.”

A lower valuation for the sector may not impact all the players though. For instance, Mumbai-based Hiranandani and Delhi-based Unitech, who are currently looking at listings in the London exchange, are raising money at the project levels, as in offering stakes to investors in particular projects — and not on the company balance sheets. There is more predictability in such cases.