Double whammy for investors as property firms skip dividends

It's a double whammy of sorts for the investors in property stocks.

On the one hand, prices of these stocks have eroded up to 70 per cent from their 2008 peaks, and on the other, most of the real estate companies that have declared results so far have chosen not to pay any dividends for 2008-09. Some of these realtors include big names like Indiabulls Real Estate (IBREL), Housing Development and Infrastructure (HDIL) and Parsvnath Developers. Quite expectedly, these realty firms are blaming their decision to skip dividends this time on declining cash flows.

Riding on the boom in the property sector, developers had paid dividends in the region of 30-675 per cent during the financial year (FY) 2008.

Even DLF, Puravankara Projects and Orbit Corporation, which have declared their unaudited results, have not yet announced dates for their annual general body meetings (AGMs) or board meetings for the purpose of declaring dividends.

Even in cases where developers have declared dividends, they have cut the rate sharply. Bangalore-based Sobha Developers has declared a 10 per cent dividend (Rs 1 per share) for FY09 as against 65 per cent (Rs 6.50 per share) it paid in FY08.

Unitech, which posted a 29 per cent fall in its net profit for FY09, has declared a 5 per cent (Rs 0.10 on Rs 2 paid-up shares) dividend for its shareholders. The company had paid 12.5 per cent (Rs 0.25 per share) dividend in FY08.

"We have to preserve everything when projects have come to a standstill. We have to deploy money in projects and complete them,'' said Ravi Ramu, director of Puravankara Projects, a Bangalore-based developer.

Property prices have fallen up to 40 per cent and transactions have gone down 70 per cent from their peak in 2007-08 as the economic downturn impacted sales of homes and leasing of offices, affecting the profitability of real estate companies.

The margins of top realty developers such as DLF and Unitech have fallen to 20-30 per cent from 50-60 per cent earlier as they shifted their focus to the affordable segment in a bid to buck the slowdown.

"Even though developers are selling houses in the affordable category, these are just a fraction of what they used to sell in 2006 and 2007,'' said Sudhir Nair, head of Crisil Research.

Eleven out of the 14 companies in the BSE Realty Index that have declared their FY09 results so far have posted over 30 per cent fall in their sales and net profits.

The aggregate net sales of these companies have declined by 31 per cent to Rs 18,516 crore in FY09 as compared to Rs 26,748 crore in FY08. These firms had posted a sales growth of 133 per cent in FY08. The combined net profit of these firms has declined by 43 per cent to Rs 7,298 crore in FY09 as compared to Rs 12,771 crore in FY08. These companies had recorded a 167 per cent jump in net profit in FY08.

"There is no real money with real estate companies. Whatever money they generated has gone in interest and debt repayments,'' said Rupesh Sankhe, an analyst with Centrum Broking, a stock brokerage. But, don’t investors in real estate prefer growth of their investments to dividends? Yes, they do, says Shailesh Kanani of Angel Broking. "Investors are worried about how the sector will pan out and how the liquidity will improve for real estate companies than dividends,'' he says.