27 June 2017 15:05:31 IST

Real estate sector hit by note ban in 2016-17

Sales were down 24 per cent for top listed players

The financial year 2016-17 was a bad patch for the real estate sector. Hit by the note ban, sales were down 11 per cent as compared to the previous year, when it posted a robust sales growth of 18 per cent.

Most of the large real estate players took a beating — revenue of Unitech, HDIL, Oberoi Realty and Prestige Estates ended lower in the year. Godrej Properties was also hit by the downturn; its top-line was down 24 per cent to ₹1,733 crore in 2016-17. However, some players like Mahindra LifeSpaces bucked the trend; its sales were up 21 per cent during the year.

The implementation of RERA (Real Estate (Regulation and Development) Act, 2016) and demonetisation have affected housing sales throughout the country. Demonetisation effectively put a halt to the process of investing black money into the real estate sector, a practice that was rampant in the country. And with RERA expected to be rolled out in various States, many builders put new projects on hold, awaiting clarity from the State governments.

Market thumbs-up

However, in the past few months the market has given a thumbs-up to real estate stocks. Stock price appreciation of eight of the top 10 realty companies averaged at about 33 per cent in the last one year, compared to 15 per cent gain in the Sensex. Among the top performers were Indiabulls Real Estate, Godrej Properties and DLF. Their stock prices were up 121 per cent, 58 per cent and 39 per cent respectively. Indiabulls Real Estate is currently undergoing a major scaling up of its operations and plans to reduce its debt levels.

The market also expects RERA to professionalise the sector, which will benefit companies with good governance, like Godrej Properties and Mahindra Lifespaces, through consolidation of industry players.

In the financial year 2016-17, however, the net profit of the realty companies was down by about 31 per cent. Escalation in project costs and debt liability squeezed margins of real estate companies. But, some players — Sobha Developers, Prestige Estates and Godrej Properties — posted a growth in profit.

Going ahead, Goods and Services Tax (GST) impact and interest rates will play a crucial role in the fortunes of realty players. Under the new GST regime, which will take-off on July 1, real estate will be classified under products with a 12 per cent tax rate. While service tax and VAT applicable in various States will get subsumed into the GST, stamp duty and registration charges will not be. So, even though the effective tax rates will remain similar to pre-GST rates, the worry is about the input costs. Some inputs, for instance ceramic tiles and sanitary ware, will get charged at the highest rate of 28 per cent under GST. It is yet to be ascertained to what extent real estate players will be able to absorb new market realities and pass on spike in costs.

A lower interest rate regime will have a salubrious effect on house buying.