US Housing Crisis Melts Indian Realty Valuations

The sub prime crisis may have struck in the US, but real estate companies around the world are feeling the heat. The meltdown in property firms’ valuations in other economies, including India, China, Japan and the UK, has surpassed that of the US with Indian real estate companies witnessing one of the biggest falls. Some leading Indian real estate firms are trading at about 34% discount to their net asset values, which implies that property firms are being valued at just two-thirds of the assets they hold.

This makes India the second-most affected nation after Malaysia in the first quarter of 2008 among key property markets, according to a Citigroup report. Interestingly, in the US, the property market index is trading at just 12% discount to its NAV. Its performance is even better than the global index, which is ruling at an 18% discount. NAV is the present discounted value of all future cash flows of a property firm. It factors in the existing land-bank, overall development opportunities and project execution of a property firm. It is a valuation tool for real estate firms.

Analysts say the discount to NAV shows that the Indian property market is on a downswing. According to Mr. Rupesh Sankhe, ICICI Direct real estate analyst, “Historically, when the property market cycle is on an upswing, firms trade at a premium to their NAVs, and during a downturn, this tends to get reversed with shares trading at a discount. Since real estate stocks are high risk, the trend gets amplified.”

Indian property stock prices have dropped as much as 50-67% and underperformed the Sensex by 23% in the first quarter of 2008. Such a sharp fall has widened the discount to their NAVs, which was just 1-2% in November ’07. This is despite the fact that Citigroup has lowered the NAVs of Indian property firms by 9-27% in its analysis.