News & Views on Indian Real Estate

Tuesday, September 16, 2008

Lehman fall may deepen realtors’ credit woes

Domestic realty stocks fell sharply on Monday, mirroring the larger trend on the bourse and concerns over tightening of liquidity in the real estate market after US investment bank Lehman Brothers Holdings Inc., an investor in some of these firms, said it intends to file for bankruptcy.The real estate firms involved said they would not be affected as Lehman’s investments had already been credited to their accounts.

Shares of realty firms in which Lehman Brothers has directly or indirectly invested in fell sharply. Stock prices of India’s leading real estate developers DLF Ltd and Unitech Ltd were down by 7.5% each on the Bombay Stock Exchange, or BSE. Shares of Mumbai-based Orbit Corp. Ltd, in which Lehman owns shares, were down 11.69%.

These stocks—together with other plunging shares of realty firms such as Ansal Properties and Infrastructure Ltd and Housing Development and Infrastructure Ltd (HDIL) — dragged the BSE realty index down 7.65% in comparison with the Sensex, the bourse’s benchmark index, which fell 3.35%.

Analysts said the crash in real estate stocks was on account of heavy selling on concerns over future funding for real estate firms. “Real estate shares must be down because of a combination of Lehman’s bankruptcy news and the fact that real estate stocks are traditionally high beta stocks,” Unmesh Sharma, an analyst with Macquarie Research, said. A high beta stock is one that swings more than the market.

While the Sensex is down by 12.17% compared with a year ago, the BSE realty index, which is a sectoral index of 14 realty stocks such as DLF and Unitech, has shed more than 45% in value.Another analyst said Monday’s meltdown came about as investors moved to less risky stocks. “As an asset class, real estate is risky, so investors could be realigning their portfolio to less risky asset classes,” the analyst said, asking not to be named. “There are also fears that we are going to see a further tightening of liquidity conditions in the real estate market because, globally, money will become dearer.”

The firms that had investments from Lehman Brothers Real Estate Partners, a $4 billion, or Rs18,360 crore, realty private equity fund, meanwhile, shrugged off worries. The fund has so far invested more than $380 million in realty firms and their units here.

In 2007, the fund invested $200 million in DLF Assets Ltd, the promoter-owned company of DLF, that a company spokesperson said DLF Assets had received entirely.

A Unitech spokesman said the firm, too, had received money from Lehman. In June, Lehman agreed to invest $175 million for a 50% stake in the initial phase of Unitech’s Santa Cruz project on the western expressway of Mumbai. According to the agreement, Lehman gets 50% equity in the specially floated firm that will develop 1 million sq. ft of an 18 million sq. ft office space project.

“The deal will not be affected by Lehman’s bankruptcy,” the spokesman said.
In 2007, Lehman had tied up with HDIL to form a venture to bid for the Rs13,000 crore slum development project in Mumbai’s Dharavi. HDIL, which held majority equity stake in that venture, said the partnership with Lehman needed to be able to qualify for the bidding process was intact. “(Lehman’s) fund is pretty secure and they still remain as partners,” Sarang Wadhawan, HDIL’s managing director, said. Lehman also holds direct stakes in Orbit and Hyderabad’s IVRCL Infrastructures and Projects Ltd. The fund has a 4.82% stake in Orbit and a 1.20% stake in IVRCL. “Lehman picked up the stake during our initial public offer for $4 million and they paid up the entire amount,” Pujit Agarwal, Orbit’s managing director, said on Monday.