Why real estate stocks are a pariah for astute investors?

Business

oi-Sunil

By Sunil Fernandes

Published: Thursday, October 18, 2012, 8:30 [IST]

If there's one set of sectoral stocks that are ostracized by big domestic institutions and foreign funds, than it has to be the real estate sector stocks. If one does an analysis of the portfolio of a mutual fund scheme, you would seldom find a real estate stock.

The real estate industry is known for its shady practices and over-leveraged finances. Companies like DLF, Unitech, HDIL and DB Realty having been in the news for all the wrong reasons.

Several analysts have a strict "no" for investment in the sector, because of the chequered past of some of these companies.

Take the case of DB Realty. The Central Bureau of Investigation (CBI) last year arrested Shahid Balwa, promoter of DB Realty, in connection with the 2G spectrum allocation. The stock which had been scaling highs during the 2007 period, fell off a cliff, leaving investors high and dry.

In fact, the stock which had hit a high of Rs 474 during the glory days, plunged to almost Rs 47 late last year. The stock is current trading at Rs 104 and is nowhere near its peak.

The same is the case with one of the yesteryear's favourites - Unitech. Sanjay Chandra was arrested in connection with the 2G scam and the company's finances are known to be in a mess. The stock which was quoting at Rs 537 during 2007-2008 period is down to just Rs 25. Some money by exiting its telecom business is likely to provide a temporary succour to the company's finances.

Similar is the case with the largest player in the business, DLF. The company's accounting practices have been questioned in the past, with one analyst calling it a "crumbling edifice". The company is sitting on a debt pile of Rs 23,000 crores.

The latest of course for DLF is the allegations and nexus with Robert Vadra. The stock has been losing consistent ground ever since the allegations surfaced and has lost sheen over the last few weeks.

Whether these set of stocks would ever stand and rise again seems doubtful. Once the management integrity, ethics and accounting practices are questioned, these stocks remain a pariah for astute investors.

Having said that there are a few companies from the real estate pack, particularly from the South that still have an untarnished image and their stock prices reflect that. These companies include Sobha Developers, Prestige Real Estate and Brigade Enterprises. Of course, not to mention Godrej Properties and Mahindra Lifespaces, which still remain blue chips from the sector.

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