Labour woes, rising costs hit realty firms

Major real estate developers see drop in net profits in the second quarter; revival unlikely in the next two to three months, say analysts.

The shortage of labour, a fund crunch, high interest rates and steep input costs have hammered the net profits of major real estate developers in the second quarter.

While developers are saying the scenario is challenging, analysts feel a revival is unlikely in the next three to six months.

DLF Ltd recorded an 11 per cent decline in net profit, while that of Unitech dipped by 46.83 per cent, Parsvnath 41.5 per cent, HDIL 23 per cent, and DB Realty by as much as 89 per cent, compared with net profits in the corresponding period last year.

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Analysts say construction costs rose by nearly 30 per cent in the second quarter of 2011-12, owing to a sharp rise in labour, steel and cement costs.

Steel prices rose 10 per cent in the second quarter, according to Kaustuv Roy, executive director, Cushman and Wakefield.

The National Real Estate Development Council (Naredco) had recently moved the Competition Commission of India, challenging the cement industry move of hiking cement prices by over 55 per cent in a period of one month.

Also, interest rates have jumped to 12-13 per cent, resulting in buyers deferring their buying decisions, said R R Singh, director general, Naredco.

"About eight-nine per cent is a comfortable level. I do not see interest rates falling anytime soon, given the reserve Bank of India's aggressive stance to control inflation", he said.

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Sales were down as well.

Unitech's net sales during the quarter declined by Rs 18.45 crore (Rs 184.5 billion) to Rs 626.06 crore (Rs 6.26 billion).

While HDIL's top line declined 15.8 per cent, DB realty recorded a steep fall of 50.75 per cent in its revenues.

Even as DLF's sales rose six per cent to Rs 2,532 crore (Rs 25.32 billion) during the quarter, the sales volume was muted, according to the company.

It blamed the delay in approvals of its new launches for the slow sales during the quarter. Parsvnath, however, saw a 28.7 per cent surge in its revenue.

Most companies stayed away from new launches in the quarter.

The third quarter may see a similar scenario, one that is focused on deliveries.

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Pradeep Jain, chairman, Parsvnath Developers, said, "We are not launching any new projects, as we want to complete the projects at hand and deliver on time".

Anshuman Magazine, chairman and managing director, (South Asia), CB Richard Ellis, told Business Standard customers were more aware now, and this was exerting pressure on developers to concentrate on the projects at hand.

Cushman's Roy said developers were more concerned about how much they commit, given the uncertain and the inflationary environment.
However, deliveries are yet to pick up pace.

Parsvnath delivered just 0.22 million sq ft of the total deliverable area of 78.37 million sq ft under construction in the second quarter, while Unitech delivered just 0.5 million square ft of completed area this quarter, compared with 1.6 million sq ft in the first quarter.

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It completed and delivered just two per cent of the total projects launched since March 2009, that is, just 0.5 million sq ft of the total 20.4 million sq ft.

However, for projects launched before 2009, the company handed over 76 per cent — 18.5 million sq ft area of the total 24.1 million sq ft.

"The real estate industry is grappling with a 20-30 per cent labour shortage, leading to delays in deliveries", said Sanjay Sharma, managing director, Qubrex. Sachin Sandhir, managing director (India), Royal Institute of Chartered Surveyors, said even if a regulator came in, project delays could not be avoided, as there was a huge shortage of labour.

According to Roy, key construction companies have their hands full, owing to the infrastructure development being carried out across the country, resulting in delays in project deliveries.

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To deal with the problem of labour shortage, DLF has decided to offer construction contracts to major construction companies.

Meanwhile, the expenditure for realty players has escalated. Parsvnath's expenditure nearly doubled during the quarter ended September to Rs 186.12 crore (Rs 1.86 billion), compared with Rs 99.88 crore (Rs 998.8 million) last year, owing to the rise in construction costs that more than doubled to Rs 151.76 crore (Rs 1.51 billion) from Rs 71.46 crore (Rs 714.6 million) last year.

HDIL's expenditure soared 61.3 per cent, while Unitech's rose 23.92 per cent compared to the corresponding period last year, with the total rising to Rs 496.4 crore (Rs 4.96 billion) against Rs 400.57 crore (Rs 4 billion) in the second quarter of 2009-10.

Many developers are selling their non-core assets to reduce debt.

While Unitech managed to cut debt by Rs 191.02 crore (Rs 1.91 billion) during the July-September quarter, taking the net debt level down to Rs 5,144.04 crore (Rs 51.44 billion), DLF saw its net debt rising by Rs 1,000 crore (Rs 10 billion) to Rs 22,519 crore (Rs 225.19 billion).

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Unitech plans to cut debt by Rs 500 crore (Rs 5 billion) by the end of the current financial year by selling non-residential assets.

DLF, too, plans to cut debt to Rs 19,000 crore (Rs 190 billion) by the end of 2011-12. Parsvnath's net debt stood at around Rs 1,200 crore (Rs 12 billion), which the company plans to reduce to below Rs 1,000 crore (Rs 10 billion) by the end of the financial year.

It plans to sell land in south India, a region in which it does not plan to venture in the near future.

On how the coming quarters would turn out for real estate players, Qubrex's Sharma said, "I do not expect things to improve, at least in the next one year, given the uncertain times in the economy, legislation and land acquisition."

Roy said though deliveries would be a challenge, developers may see a healthy rise in bookings in the third quarter.