Real estate issues face uphill task

Real estate companies appear to be the worst hit by the ongoing global uncertainties, coupled with the new norms for primary market issuances.

At a time when confidence is yet to fully return to the market, experts feel this rate-sensitive sector will see only subdued response from investors. This could come as a blow to the companies, which plan to raise Rs 12,000 crore (Rs 120 billion) in the coming months.

According to Prime Database, nearly 10 real estate public offerings have got the final go-ahead from the Securities and Exchange Board of India.

Some high-profile names are Emaar MGF Land, Lodha Developers, Oberoi Realty, Ambience and Neptune Developers. Since the Sebi approval is valid for a year, the coming months will see these companies roll out their issues.

The current calendar year has seen three initial public offerings (IPOs) from the real estate sector - Jaypee Infratech, D B Realty and Nitesh Estates. While Jaypee Infratech and Nitesh Estates issues were subscribed a little over one time, D B Realty was better subscribed at nearly three times.

Many analysts view the sector with scepticism due to factors like land valuations, project delays and politics.

"The sentiment has not improved for the sector," said Amit Goenka, national director, capital transactions, Knight Frank. "Most of these companies are looking for anchor investors, but there is hardly any appetite. The valuations are high. Some of the companies planning to tap the markets are eyeing a multiple of 85-90 times, which is quite high. There is also a huge debt overhang. Clearly, there is no value left for investors."

Market experts say the current volatility in the secondary market has made most investors risk-averse and this impacts sectors that suffer from inherent risks.

"In a volatile market, investors with less risk appetite will not come forward to participate," says Ashvin Parekh, partner & national leader, Global Financial Services, Ernst & Young.

"They will particularly shy away from sectors where there are substantial price and delivery risks. Going forward, we may find that domestic retail investors will continue to participate only in low- to medium-risk offerings," he said.

"FIIs (foreign institutional investors) will also look at small maturity/short-term investments. Liquidity, or lack of it, will also weigh on the minds of investors," he added.

But, not everyone agrees. "The quality of issuers and pricing are more important determinants of the success of an issue rather than the sector," says Sanjay Sakhuja, CEO, Ambit Corporate Finance. He, however, acknowledges that "some sectors are always more in favour than others."

Some other challenges the sector faces include the government's divestment programme, which aims to raise Rs 40,000 crore (Rs 400 billion) in the current financial year, and the new IPO norms that call for 100 per cent upfront margin from institutional investors.

"The biggest challenge to these IPOs is the huge disinvestment line-up. All large domestic institutions, especially government-sponsored ones, want to invest in a PSU rather than a private company. FIIs have become very cautious," says Goenka.