Security Analysts Criticise Real Estate Companies

February 3, 2009	(2 votes, average: 5 out of 5)  Loading ...
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The once-hot Indian real-estate industry is suffering from a clampdown on lending by financial institutions that has hurt demand for apartment and commercial property. Moreover, in the wake of the accounting scandal at giant outsourcer Satyam Computer Services Ltd. — the company’s founder admitted to inflating the books, creating a fictitious bank balance of more than $1 billion — corporate governance has come into focus across Indian industry.

Real-estate companies in particular have been criticized by securities analysts for a lack of transparency in their property dealings and in how they account for projects. In a sign of the tough times, Rajiv Singh, vice chairman of DLF Ltd., India’s biggest real-estate company by sales, warned at a news conference Monday that the company expects prices for new property to fall between 10% and 15% in the next three months, and said prices had already slumped 30%.

He added that the company is in talks to replace loans totaling 40 billion rupees, or more than $800 million, with cheaper ones in a bid to cut its finance costs. DLF said its DLF Assets Ltd. unit is in talks to raise as much as 25 billion rupees by the end of March through a private placement. “The present situation is very different from the boom that we had been seeing in the past few years,” Mr. Singh said in a statement accompanying the earnings figures. “The real-estate industry has moved from a period of abundant capital availability to times of liquidity crisis.”

On Saturday, DLF posted a 69% drop in net profit in the three months ended Dec. 31, to 6.71 billion rupees from 21.39 billion a year earlier. Revenue fell 62% to 13.67 billion rupees. On Monday, DLF’s shares fell 14% to 153.20 rupees. So far this year, DLF’s shares have fallen 46%, compared with a year-to-date drop of 6% in the benchmark Bombay Stock Exchange Sensex index. Overall, India’s property sector is under immense pressure because of the poor market conditions, said a report issued in December by Mumbai-based Kim Eng Securities India Ltd. “With weakening property demand and a difficult business environment, we believe bankruptcy risk is rising for listed property companies,” the report said.

As the industry struggles, analysts also are scrutinizing companies’ accounting methods and transparency and, in many cases, finding them wanting. In its report, Kim Eng drew attention to accounting practices common in the sector that it describes as “suspect.” One such practice, which is permitted under Indian accounting standards, is that some of the cost of interest on land banks and unfinished projects can be accounted for along with the company’s assets. That temporarily boosts earnings by reducing interest expenses and adds to book values, making it appear that the company’s land holdings and unfinished projects are worth more.

Later, the interest cost would be charged against profits and no longer counted with the company’s assets, said Jigar Shah, head of research for Kim Eng in India, in a telephone interview. Another area of concern is transparency. Credit Suisse, in a report issued Jan. 19, noted that the Singh family, which holds some key management positions at DLF and owns a large chunk of the company, has privately controlled entities from which DLF buys land. DLF has “no transparency in the land acquisition process,” Credit Suisse said. Credit Suisse said that, in general, there is a higher risk of corporate-governance issues when a deal is with a related party.

Credit Suisse analysts said they believed DLF’s disclosure of its land holdings in its annual report was inadequate. In an email, a DLF spokesman said DLF has never bought land from its main shareholding family or any of the family’s companies. “All related party transactions are disclosed completely,” he said.

News Published Under:   Real Estate Developers |

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