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Earnings of real estate developers, who have been hit by high costs and interest rates, would improve in 2013. “Sustained growth in demand, expected to improve on interest rate cuts likely next year, will be a key determinant for the improvement in industry’s profitability and RoEs (return on equity),” ratings agency Crisil said.

Subdued demand, high construction costs and interest rates have dented the earnings and return ratios of real estate companies in the country over the past two years. “Overleveraged, many large real estate companies could not substantially reduce debt.”

“We believe GDP growth has bottomed out and expect gradual recovery in 2013-14,” Crisil said. Crisil expects the RBI to cut repo rate by at least 50 bps (0.5%) in the next one year. “This will improve affordability and fuel demand recovery,” it said.

An analysis of historical absorption trend after the softening of interest rates shows that key performance metrics see an improvement. “Our analysis also suggest 8% increase in PBT (profit before taxes) and 100 bps (1%) increase in RoEs at an aggregate level purely on 50 bps decline in interest rates,” Crisil said.

The earnings and return ratios of real estate firms would improve due to increase in demand and low interest burden, it said. Crisil also expects absorption of new residential units across six key cities-Mumbai, National Capital Region (NCR), Pune, Bengaluru, Chennai and Hyderabad-

to increase at a CAGR (compounded annual growth rate) of 7% to 251 million sq. ft. in the next two years. Capital values however are expected to remain flat and would rise marginally only in the second half of 2013.

Most real estate stocks have significantly underperformed the benchmark Nifty in the past two years and trade at historically low valuations. Select real estate stocks offer upside potential from their current levels and valuations would improve and return to historical levels of 2009-10, Crisil said.

Via : TOI