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Friday, November 26, 2010

Real Estate Stocks - To Buy Or Not Now?

With CBI taking action against guilty real estate companies, tainted banks and middle men for arranging loans for these companies, finance minister directing banks on NPA quality and the music real estate firms are facing in bribery scam, should you buy stocks of these companies since almost all real estate stocks are correcting significantly in ongoing market turmoil?

It was a big shock to real estate companies, banks and of course stock markets when CBI raided few banks and financial service providers and arrested key people like CEO, CMD and MD's from these banks and institutions for bribery cases. The entire real estate industry, banking space and overall India was shaken like 10 Richter scale earthquake has hit India.

Indian stock markets were shaken from top to bottom loosing all the steam when markets were trying to sustain the 20,000 levels. At one point of time, markets went below 19,000 levels today but recovered later.

Almost all real estate stocks have corrected more than 25% in last 2-3 days. So should you rush to buy stocks of real estate companies?

Indian stock markets have overreacted to this situation, which is a bribery case. These things were always there since long but it is just that this time it has come in light. While approving big loan amounts, bank officials are always bribed/pleased by loan seekers. These things are behind curtains. Loans are not going to go anywhere unless some real estate company fails to repay it. BUT ... yes there is a but ... banks would become overcautious now while sanctioning loans to real estate developers. This is going to create a liquidity crunch in market and this is going to pinch all real estate developers.

Real estate sector is well known for worst corporate governance and perhaps this is one of the most corrupted businesses running around. So whatever is happening is not new. Since it is a bribery case, hope so, guilty people would be punished and everything should be fine unless money has not been diverted to non existing participants (duplicate companies/stock market players etc.).

Real estate developers keep huge inventory (flats/properties) at their disposal which they want to sell at high rates. All the property prices in India are artificially maintained at higher levels by all property developers. They don't get entire cost of their product(flats/properties in this case) unless they actually build and deliver it to consumers. So where do they get money to construct properties till they deliver? Banks is the answer. Real estate developers get loans from banks for almost each project they plan for. And then they manage to not to lower the property prices even if they add up units to their inventories.

This is going to be difficult now. Real estate developers will have to get rid of their inventories (unsold flats/properties) since they would face difficulties in getting cash from banks. And you know what happens when everyone wants to sell in markets. Market gets oversupplied resulting in price crash. Property prices are going to correct which means real estate developers would get lesser money resulting in lesser revenues and even lesser profits.

Read more: Realty Stocks, Debt And Investors

Stock markets look only at topline and bottomline and for real estate companies, these two lines are definitely going to be damn difficult to maintain. This would result in unstable stock prices and growth in near future.

Conclusion: Let this turmoil settle, take a re-look at real estate stocks on stock to stock basis and then decide whether you should buy stocks of real estate companies in this correction or not.

If you have some good stocks researched, it could be a good opportunity to buy stocks of those companies since markets are in correction mode. Real estate stocks are exception to this suggestion.

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