Realty stocks bounce back on FII power

Boosted by the confidence shown by foreign institutional investors (FIIs), the once beaten-down real estate sector has witnessed a resurgence at the stock market even as concerns on their ability to deliver and the quality of their books of accounts linger in the air.

In the rally since March 9, when BSE's benchmark Sensex hit a low of 8,160, the real estate sector has led from the front. While Sensex at Bombay Stock Exchange (BSE) rose by 107 per cent, the realty index grew by 246 per cent, highest among all sectoral indices at BSE.

“The shortage of housing units in India is leading to demand coming back,” said Aseem Dhru, CEO, HDFC Securities. “Since real estate precedes other form of growth in a growing economy, lot of hot money is coming into these stocks.”

Flush with land banks, Indian real estate companies crumbled in 2008 when credit tightened and it turned hard for them to go ahead with the ongoing projects. In the process they piled up huge debt. But when the liquidity eased they used the qualified institutional placement (QIP) route to sell shares in order to spruce up their balance sheet and reduce debt.

“As the real estate companies managed to raise funds through QIP, investors interest got stronger,” said Vinay Gairola of Atlantis Investments.

And with economy back on growth path, the FIIs have resurrected their faith into these companies.

Real estate has been at the forefront of this rally because the sector saw huge value erosion in 2008 and it was in the radar of most managers as there were early signs of revival in real estate companies in form of restructuring of balance sheet,” said Gairola.

Till 2006, FIIs had zero exposure to the Indian real estate sector and it has grown significantly since then.

As of now the total FII exposure to the Indian real estate sector stands at around $ 7.5 billion (Rs 36,750 crore) and three-fourths of the total FII investment this year has gone to real estate, banking, engineering and oil and gas sectors,” said a market expert, who did not wish to be named.

Even as the money continues to flow into the realty sector, market players say that the concerns do exist.

“Investors still face challenge on the valuations front and concerns on impact of interest rate, regulatory changes and large size of unorganised players do exist,” said Gairola.