Real estate sector to ride the subprime woes

The US subprime credit defaults have become a bugbear for most global markets, though none of them, except for the US market, seems to have been directly impacted by it.

Concerns over the crisis in the US subprime lending market, where loans are offered to borrowers who do not qualify for market interest rates because of poor credit history, has sent world markets into a tailspin since the beginning of the month.

Though the markets recovered well on Monday, taking cues from buoyant conditions following US Fed’s intervention on Friday, the realty sector still appears to be a bit jittery. Any adverse news or events relating to the US subprime could further upset the sector, say market watchers.

Most global markets have been witnessing extreme bearishness and volatility over the past couple of weeks. Stocks of real estate companies, listed across world exchanges, have been at the receiving end. Key US sectoral realty indices have fallen by 11-32%. The US Mortgage REIT Index is down 32% over the past one month.

As far as Asian indices are considered, there has been a ripple effect of the shake-up in the US market, as most realty benchmarks have fallen down in the range of 9-11% over the past one month. The Singapore Property Equity Index has plummeted 21% over the period.

“Though indirect ripples could not be ruled out, the subprime crisis should not affect Indian real estate sector as much as it impacts European countries and the US. Forget India, it should not even hit Asian markets (excluding Japan) like Singapore and Hong Kong,” Emkay Shares & Stock Brokers analyst Navin Jain said.

“There may be some blips or dips in real estate sector as it is closely related to mortgage loans; infrastructure sector looks perfectly fine. As far as India is concerned, the construction sector would continue to do well in the long term. Stocks in the sector would bounce back once the market stabilises. The sector would be buoyant as foreign direct investment into India is unlikely to drop,” Mr Jain added.

Fundamentally, there should be no impact of subprime on GDP growth of the country or earnings of Indian corporates. Minus the concerns of US credit defaults, the market is well-poised as interest rates have softened a bit and inflation seems to be under control, analysts said.

“Indian real estate does not have any direct exposure to the US subprime credit market. Moreover, subprime fears in the US can only trigger negative sentiment in markets that have low or no exposure; there will be only concerns of a probable real estate slowdown shrouding the sector in subprime insulated markets. However, to be on the safer side, investors can overlook real estate stocks for some time; infrastructure companies look good even in these market conditions,” said India Infoline vice-president-research Amar Ambani.

According to analysts, the trouble may start when large-sized funds, with exposure to highly-leveraged subprime markets, start liquidating their holdings in emerging markets to make good their losses in a sinking subprime market.

Indian market has been witnessing a series of large outflows over the past one week as a result of probable losses suffered by overseas funds in the US subprime market.