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Real Estate Industry Post Elections

If you are related to real estate sector, this election might bring good news for you! Realtors have faced a severe cash crunch over the last nine months as the global financial crisis squeezed liquidity and high prices kept buyers of homes, offices and shops away. New projects have since been put on the backburner while many of those under construction are delayed, especially commercial. This new election results might bring cheers to all of you who were waiting for realty sector revival.

Unexpected Election Results

Congress-led coalition defied predictions of a tight race and was only 10 seats short of an outright majority, sending shares up for its biggest one day gain in almost two decades on the first trading day post election results. BSE Sensex gained 2110 points in the single trading session on Monday May 18, 2009. Stock markets reached the upper circuit breaks for the first time in the history. Thus, market gave its thumbs up to the new UPA government. So why did the market react this time so differently? The biggest dissimilarity between this UPA coalition and that in 2004 is the absence of Left Brigade. Known for its extreme opposition to reforms, FDI and divestment Left stalled a number of projects between 2004 and 2009. Now with Left’s abysmal performance in the election and absence from the UPA, the new government will be serious and have the luxury to push all these impending reforms. The industry can expect the broad reform agenda would continue under the United Progressive Alliance (UPA) government and the realty sector to benefit. With a stable government in place, foreign investment will flow in. Also, we can expect less interference and arm twisting by regional parties and thus, the government would be more focused on creating employment, reforming policies and interacting with industries bodies for favorable policies.

Maintaining that the real estate sector is poised for a revival, one of the leading developers’ executive said: "It will grow steadily and undoubtedly. Affordable housing will get attention. In brief, formation of a stable government will certainly bring back confidence among investors and end-users and help in reviving the market sentiments." Most of the analysts and industry bodies supported his arguments.

Real estate companies may expect industry status for real estate sector from the new government. However, this won’t happen unless and until developers and industry bodies lobby hard for this. Government may negotiate for an industry regulator for real estate sector if it has to grant an industry status to it.

Shock on Stock Market

This election saw total reversal of UPA’s fortune as well as Indian Stock exchanges. If UPA’s win in 2004 election caused “Black Monday” where BSE Sensex lost around 750 points in a single trading session, UPA’s win this time sent shares up for its biggest one day gain in almost two decades on the first trading day post election results. BSE Sensex gained 2110 points in the first session itself; prompting authorities to halt the trading. Stock markets reached the upper circuit breaks for the first time in the history.

Trading Suspension History

Date Sensex % change
April 28, 1992 3896.90 -12.77
May 17, 2004 4505.16 -16.62
May 22, 2006 10481.77 -10.16
Jan 22, 2008 16729.94 -10.85
May 18, 2009 14284.21 17.34

Sensex Biggest Single Day Gains

Date Sensex Points Gain % change
May 18, 2009 14284.21 2110.79 17.34
Mar 24, 1992 3669.58 426.05 13.14
May 13, 1992 3431.13 344.76 11.17
Feb 19, 1991 1149.89 110.29 10.61
Mar 02, 1992 3333.25 315.57 10.46

So why does elections affect stock exchanges? Going by data for the last eight elections from 1980 onwards, stock markets tend to dance in the run-up to the Lok Sabha elections with the Sensex showing an average 4% gain in the three months preceding elections. Expectations of a reform-minded government seem to enthuse investors as much as gains in sectors that benefit from poll-related expenditure.

A clear mandate for the United Progressive Alliance and the continuity of the current government's policies are likely to keep the markets buoyant for a while. Congress manifesto lists economic revival and restoring high growth as its immediate priority. Market experts believe that foreign institutional investors and domestic institutions, which were not participating aggressively in the markets thus far, are likely to invest for the long term, given the stable government at the Centre. Some experts are wondering whether the benchmark index break another record set in 1991, when it soared by 35% in three months after the announcement of results.

Opening up of the economy, allowing foreign direct investment and easier interest rates should improve liquidity and are expected to help sectors such as infrastructure, banking, real estate, telecom, power, education and retail.

With the Left brigade that crippled decision-making now out of the way, the new government is likely to speed up the divestment of its stake in various PSUs. While experts believe that the markets could touch the 18,000 mark, stiff valuations and the burgeoning fiscal deficit could cap the upsides. Foreign investors are now wary of sudden high valuations as fundamentally nothing much has changed much in the overall economy. However, they may not sell and exit because that would give them idle cash to sit on.

FMCG and Pharmaceutical sectors, which are considered defensive, are likely to underperform as the market chases growth. IT services, which is another defensive sector, is unlikely to participate in the rally given that the rupee is expected to gain in the short term. We can expect infrastructure, banking, real estate and retail sector to lead the growth in the coming months.

Let us analyze the real estate sector for the moment. A year back real estate sector was the darling of Indian as well as foreign investors. It attracted highest FDI due to massive boom in the market. However things went horribly wrong with the sub-prime crisis in the US and most of real estate sector stocks lost significant value. But things have started looking little better for the real estate now.

What realty sector can expect going forward

India's realtors, one of the worst-hit by the slowdown, believe the sector will get more attention under the new government given its professed thrust on infrastructure. Liquidity-starved sectors such as infrastructure and realty could be the biggest beneficiaries of the vote of confidence for the UPA. The new government should mean quicker policy implementation and less excuses on execution, needed to help bring back funding for the country's crippling infrastructure projects and slowing housing sector, say builders.

People, developers and investors are all positive and excited about this new government. We may expect some reforms in the banking sector like up the banking sector to foreign players and consolidate PSU banks. For example, SBI has already merged one of its associate with itself and the government might consolidate other SBI associates with the parent. Such reforms with any doubt will accelerate economic growth.

With the falling interest rates and improving economic situation, banks are willing to lend to companies to take advantage of locking debt at higher interest rates. This is going to help realty industry as developers were reeling under severe pressure due to cash crunch and lending. Improvement in the liquidity situation could be the biggest positive for this sector. Now with the increase in flow of credit in the market, developers will be able to restructure their existing debt or start new projects in segments which are still having demand. Realty majors will now be able to raise funds through Qualified Institutional Placements or debt or through further equity issues. India's largest realty companies--DLF and Unitech--have already raised over a billion dollars in the recent past and chances are that others might follow. Last week, DLF, India's largest listed developer, raised $783 million through a share sale. In April, developer Unitech raised $325 million through a share placement.

One of key segments in realty industry is Affordable Housing, which is "seriously undersupplied" in India. According to a Goldman Sachs report, more than 30 million units are needed in India because of growing urbanisation. With the growing valuations on the stock exchange, developers will be able to issue equity to fund new housing projects.

With infrastructure as the key focus, the need of realty industry cannot be ignored. Analysts now believe that since the UPA can form the government without the support of the Left parties who were opposed to the idea of foreign direct investment, special economic zone projects, which were stalled, could get a fresh lease of life.

However, not all are so optimistic. Purvanakara Projects is adopting wait and watch mode. One of the executives said "Just because things have improved today, we won’t go and look for more office space tomorrow. We'll wait and watch." The corporate spending is still some while away as companies are not looking for new office spaces.

What we believe is that though the political scenario has changed, the economic scenario has not changed much. It would be a while (read 6-12 months) before any real improvements will be visible in the industry.