Thursday, October 8, 2009

Failure of a realty IPO can hurt broader markets

If you believe that neither the tantrums of the weather gods nor muted corporate earnings reports nor strained economic variables can topple the meteoric rise in the Sensex, this argument could change your views. "Real estate could be the lynchpin for the equity markets and a failure of a large initial public offering could start a correction in the market." These are not our views but of a person who is one of the most revered voices in real estate and heads the largest mortgage financing company in India. Yes we just quoted the words of HDFC Chairman Mr. Deepak Parekh. Reason enough for investors to acknowledge that his assessment of the real estate market cannot be further from truth.

Cut back to late 2007/early 2008 and one can recall large real estate players seeking billions of rupees from the IPO markets on the basis of the valuation of their 'land banks'. Ignorant investors were cajoled into subscribing to these issues on the hopes of supernormal listing gains. Many investors fell into the trap without a careful analysis of their leveraged balance sheets. However, by late 2008, most of these real estate players were struggling to carry the weight of their debt and all the euphoria around their land banks had fizzled out. But as they say - Old habits die hard!

Real estate companies are back at it again seeking billions from the IPO markets, hoping that investors have a short memory. Thanks to veterans like Mr. Parekh, you can get to see the 'real' picture!

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