Real estate companies looking to launch IPOs will need to scale back their valuation hopes as investors lose appetite for the once red-hot sector.
Surging demand for homes and offices in an economy forecast to grow 9.2 percent in this fiscal year had triggered a spate of listing plans by developers, but rising interest rates, steep valuations, lack of earnings, a market sell-off and the poor performance of recent issues have made investors edgy.
"The correction will slow things on the IPO side, especially real estate," said Ravi Sardana, vice president at ICICI Securities, referring to the recent stock market skid. "Only quality issues would find it easy to raise funds."
India's biggest real estate firm, DLF Ltd., has applied with regulators for the second time in less than a year to launch a float that could raise about $2 billion for a 10.2 percent stake.
Other developers including Omaxe Ltd., Puravankara Projects Ltd., Housing Development and Infrastructure Ltd., IVR Prime Urban Developers Ltd. and Kolte Patil Developers Ltd. have also filed red-herring prospectuses with the regulator.
"There's a big readjustment in terms of valuation expectations, which is very healthy, but it's painful in the short term to the issuers," said Vedika Bhandarkar, managing director and head of investment banking in India at JPMorgan.
Demand for new property issues has been soured by the poor market showing by recent market newcomers.
Shares in Dev Property Development have fallen about 11 percent from their late January issue price after the company raised $267 million on London's secondary AIM platform.
Mumbai-based Akruti Nirman Ltd., which listed last month, and Delhi-based Parsvnath Developers Ltd., which went public in November, both trade below their IPO prices.
Bangalore-based Sobha Developers Ltd. is more than 10 percent above its listing price, but around 40 percent below its high on its first day of trade in December.
MARKET SKID
India's benchmark index is down nearly 12 percent from its Feb. 9 peak, after falling as much as 16 percent in a global sell-off, while the drop in real estate stocks was sharper, thanks to steep valuations and doubts about sustained growth in asset prices amid monetary tightening to curb inflation.
"It was a little unnatural that Indian companies could raise capital at a 50 percent premium to NAV (net asset value) when everybody in the region raises capital at a discount to NAV," JP Morgan's Bhandarkar said.
Still, she said, with the Reserve Bank of India trying to restrict bank loans to developers, property firms will need to raise capital, whether from the public or private market.
The central bank has raised short-term lending rates 125 basis points since January 2006 and home loan rates have risen about 300 to 400 basis points in the last year.
"We need real estate development urgently, but it needs money to be deployed for construction, which can then be sold or rented. Just buying land is not enough," said Sanjay Nayar, chief executive officer of Citigroup India.
VALUATION BLUES
Indian property firms have faced a backlash over the practice of pricing themselves based on the value of their land banks -- which soared over the past three years -- and not by conventional price-to-earnings ratios.
To build up those land banks, many developers borrowed heavily, which increases the pressure on them to raise capital.
"The traditional benchmark of P/E ratio was not taken for pricing real estate IPOs, and instead they were priced based on the land bank, which caused the trouble," said M.A.A. Annamalai, director at brokerage Akshaya & Co.
"That formula won't be accepted any more," he said.
Shares in some property firms such as Hirco Plc. and Ishaan Real Estate Plc., which were listed on the London Stock Exchange's AIM platform, trade far below their IPO prices.
"Many of these issues (on AIM) shared the same flaws, being of fund rather than corporate structures, blind pool fundings rather than with identified use of proceeds, and lacking clear revenue-generating project pipelines," said Frank Hancock, head of M&A and equity capital markets for India at ABN AMRO in Delhi.
But some observers believe that demand for real estate development is so strong in India that rightly-priced IPOs will be absorbed once the volatility subsides.
"At the right price, obviously, our fund managers would be keen to invest," said Sandesh Kirkire, chief executive of Kotak Mahindra Asset Management.