Realty IPOs heading for a bubble?

It wouldn’t be inaccurate to describe the rush for shares of recently-concluded IPO of Sobha Developers as a stampede. The issue was subscribed a hundred times over – 114 times to be precise. The listing price is being pegged at almost Rs 1,000, against the issue price of Rs 640.

Parsvnath Developers recently concluded its offering and listed the scrip at Rs 300, a premium of 80%, on November 30. The issue was oversubscribed 56 times – not bad for a Rs 1,000-crore IPO.

Other developers who are preparing for public issues include Mumbai-based Akruti Nirman, Delhi-based DLF, Bangalore-based Purvankara, Delhi-based Omaxe and Pune-based Kumar Builders.

Meanwhile, Mumbai-based Hiranandani and Delhi-based Unitech are looking at listing on the AIM – Alternative Investments Market – of the London Stock Exchange.

Given the rise in real estate stocks over the past couple of years (by over 500 times in some cases) and a spate of new issues, an uncomfortable question crops up – are we in the midst of a real estate bubble? Especially if we consider that many of these companies are operating at a very small scale and their valuations are based on land banks.

For instance, Parsvnath and Sobha had PE multiples in the range of 50-60 based on the issue price and FY06 earnings. As fresh issues come in, these numbers may seem low in comparison.

“One of the reason why these scrips have done well is because excess money is chasing limited number of stocks. As the number of listed entities increase, this wouldn’t be the case. Funding can also be an issue, as several banks have reached the limit of exposure they can have to real estate. The volume of supply that’s coming in some markets – new projects launched by various builders – can also affect future performance,” says an industry source.

Some of the major players in the housing finance segment too have voiced concerns over the euphoria in the real estate sector.

“Furthermore, while a portion of the current demand is real, at least a quarter of this is being driven by speculation (in some pockets of the country, as high as three-fourths of the sales are effected by pure investors).
These buyers are unlikely to be the end users, and hence real estate is fast becoming a speculative commodity,” says Deepak Parekh in HDFC’s latest annual report.

ET Intelligence Group