INVESTMENT WORLD: Realty check: Concerns overlooked?

from BUSINESS LINE, June 07, 2009 The realty sector has been the star of the recent stock market recovery. The most battered in the 2008 fall, it is a sector on which domestic brokerages, fund managers and private equity investors were uniformly bearish, even as late as March this year.

Yet, real estate stocks were the first to be singled out in the recent stock market rally. The BSE Realty index was the top gainer among the key indices, with a stunning 209 per cent return from March 9, outperforming the Sensex by 124 percentage points.

Rags to riches Larger companies HDIL, Unitech and Puravankara Projects, as well as smaller firms such as Ansal Housing, Lok Housing and Prajay Engineers Syndicate all trebled, although the small-caps caught up a little later.

The rally also resulted in some of the real-estate companies being 're-rated' from throwaway valuations to an actual premium over the market. For instance, Orbit Corporation is currently priced at 22 times its trailing per share earnings, compared to just four times in March! Earnings for the company declined over the quarter and the full year ending March-09. Clearly this decline was factored in way ahead, going by the 'downgrades' on these stocks early on; the premium, therefore, appears to be for future earnings.

Are earnings of realty companies likely to see a quick recovery? While there …