Profitability of realty majors declined by 56 per cent in the first half of 2009-10, which contradicts concerns over formation of a housing bubble in the country, industry body Assocham said today.
“Financial performance of realty majors during the first half of current fiscal shows grim picture of the sector with a decline of 56 per cent in net profit, dampened by 51 per cent rise in financial charges and interest cost,” Assocham said.
The total income of realty majors declined by average 40 per cent in line with the fall in net profit whereas the total expenses of sector registered an average decline of 35 per cent despite an increase of 51 per cent in interest cost.
To prevent any formation of asset bubble, RBI in the quarterly monetary review last month asked banks to keep more money aside while giving loans to commercial real estate.
RBI said real estate prices, after showing some corrections in the later part of 2008 and early part of 2009, have risen significantly in major cities.
The chamber said the bank credit to the sector for one-year period till August-end this year was Rs 28,353 crore, up 41.5 per cent in comparison to same period last year.
Mismatch in demand and supply
In stark contrast, home loans amounted to Rs 14,668 crore, up by only 5.4 per cent, which contradicts a housing bubble scenario in India. “The demand-supply mismatch is unlikely to trigger a boom-bust situation due to tight regulation by RBI,” it said.
“The increased provisioning for real estate sector loans by banks from the earlier 0.4 per cent to 1 per cent is likely to shrink the liquidity of the sector by bringing additional burden to banks in lending to developers,” Assocham said.
Going forward the tightening of interest rate on home loans would also reduce the demand significantly, it added.
Even though the present situation of the sector is significantly better than later half of previous fiscal, financial condition of developers has not improved to a level that they can hold project for long time, Assocham said.
“They need cash flow to service debt, which they have taken to buy land and for its development,” it said.
The study that analysed 10 realty firms, including DLF, said the demand for commercial property is likely to remain in doldrums for remaining period of 2009-10 unless business confidence improves heavily.