Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Real Estate sector has seen the worst decline in ROEs for
multiple reasons: 1) large land bank acquisitions during FY06-08 at
the top of the cycle (a big part of which is yielding no returns); 2)
large equity raisings; 3) rise in cost of borrowings; and 4) cyclical
headwinds.
While FY04-06 was a period of strong growth for the sector, profits
in FY07 and FY08 were marked by one-offs that included DLF’s sales
of commercial assets to a promoter group entity (DLF Assets
Limited), Unitech’s sales of commercial properties to Unitech
Corporate Parks (AIM listed) and HDIL’s sale of large commercial
property to DE Shaw Group. The growth in profits, favourable tax
effect (owing to zero tax liability on sale of IT SEZs to DLF Assets
and Unitech Corporate Parks) along with high leverage resulted in
ROEs improving from 10% in FY04 to 61% in FY07.
FY07 and FY08 saw large equity issuances from several real estate
companies. Additionally, sale of commercial properties stopped
almost fully in FY09, and residential sales slowed down considerably
as prices rose to prohibitive levels, adversely affecting developers’
asset turnover. This reversed the ROE trend. Further, companies
emerging from the global slowdown made large equity issuances that
further depressed ROEs in FY10 and FY11. Lately, EBITDA margins
have come under pressure owing to inflation in labour and material
costs on partially completed projects that were sold at historical
prices. These, coupled with reversal of tax effect (companies had to
pay close to marginal tax rates owing to zero IT SEZ sales and
sunset in Section-80IB clause) resulted in ROEs declining from 41%
in FY08 to 7% in FY11.
We expect the sector’s ROEs to remain stagnant at current low levels
owing to continuing pressure on sales volumes, rising construction
costs, inability to meaningfully liquidate land banks that cannot be
commercialised in the near future, and high financing costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Real Estate sector has seen the worst decline in ROEs for
multiple reasons: 1) large land bank acquisitions during FY06-08 at
the top of the cycle (a big part of which is yielding no returns); 2)
large equity raisings; 3) rise in cost of borrowings; and 4) cyclical
headwinds.
While FY04-06 was a period of strong growth for the sector, profits
in FY07 and FY08 were marked by one-offs that included DLF’s sales
of commercial assets to a promoter group entity (DLF Assets
Limited), Unitech’s sales of commercial properties to Unitech
Corporate Parks (AIM listed) and HDIL’s sale of large commercial
property to DE Shaw Group. The growth in profits, favourable tax
effect (owing to zero tax liability on sale of IT SEZs to DLF Assets
and Unitech Corporate Parks) along with high leverage resulted in
ROEs improving from 10% in FY04 to 61% in FY07.
FY07 and FY08 saw large equity issuances from several real estate
companies. Additionally, sale of commercial properties stopped
almost fully in FY09, and residential sales slowed down considerably
as prices rose to prohibitive levels, adversely affecting developers’
asset turnover. This reversed the ROE trend. Further, companies
emerging from the global slowdown made large equity issuances that
further depressed ROEs in FY10 and FY11. Lately, EBITDA margins
have come under pressure owing to inflation in labour and material
costs on partially completed projects that were sold at historical
prices. These, coupled with reversal of tax effect (companies had to
pay close to marginal tax rates owing to zero IT SEZ sales and
sunset in Section-80IB clause) resulted in ROEs declining from 41%
in FY08 to 7% in FY11.
We expect the sector’s ROEs to remain stagnant at current low levels
owing to continuing pressure on sales volumes, rising construction
costs, inability to meaningfully liquidate land banks that cannot be
commercialised in the near future, and high financing costs.
No comments:
Post a Comment