1. Real Estate Stock Performance in comparison to Real Estate Market Dynamics
Year 2007 onwards
By
Saurabh Verma, Amity University
August 2011

2. Real Estate Stock Performance in comparison to Real Estate Market Dynamics
Year 2007 onwards
Abstract
Real estate industry is a new upcoming industry which started its journey as an index on Bombay
Stock Exchange from July 2007 onwards. The real estate index has experienced tremendous
volatility and the performance has been very poor on the Bombay Stock Exchange. Suddenly
from a record 85% growth since inception in Jan 2008; the index has been among the worst
sector performers. Even with Union budget decision to make Infrastructure (which includes real
estate per union budget) a priority sector the performance never matched the standards of other
sectors. This is very much in contract to the demand and price appreciation happening in the
market. The market has seen steady increase in prices and demand for real estate and big metro
cities are becoming mega cities with growth in outskirts of the cities. This paper tends to explore
the reasons for erosion of value in Realty index because of withdrawal of money by FDI’s and
national investors. The paper also looks into what action need to be taken at government and
industry level so as investors gain more trust on real estate stocks and invest more on real estate
stocks.
Saurabh Verma
Lecturer in Finance, Amity University
Ex. Portfolio Manager, Commodities Trader
Certified Financial Services Professional, Houston, Texas USA.

3. Introduction
This paper looks at the asset class which has grown fastest in India for the last decade ―The Real
Estate‖. Before that Real Estate sector was considered to be a part of Construction Industry.
Somewhere in 2000 the real estate started its recognition as a separate sector. Real estate sector
in India has seen rapid growth since 2002-03 onwards and FDI money was allowed in Real
Estate Sector in the year 2005.With FDI money flowing in and Government declaring
Infrastructure and real estate as priority sector with projected investment of 2,14,000 crores; the
sector is projected to have double digit growth for years to come. The period from 2005 to 2008
has seen boom in real estate prices and demand in residential, commercial and retail spaces. The
new real estate companies came into existence during this time of year 2005 to 2008 and also
more than 12 real estate companies became public; raising money by the sale of stocks in the
year 2007. BSE Realty index was created in July 2007 to measure performance of real estate
sector in the market and 14 stocks of real estate companies constitute the index. To name a few
of them are DLF, Unitech, HDIL and DB Realty. Real estate stocks had seen tremendous growth
with BSE Realty Index debuting at Rs. 7377.53 on 10th July 2007 and closing at 13,848.09 on 8th
Jan 2008 which is more than 85 % growth since debut. On the other hand; the property prices
showed 10-12 % growth during this time. After the historic market crash of 2008 the BSE
Realty Index plummeted to 1297.82 on 09th March 2009 with erosion of more than 90% value
whereas there has been little effect on the prices and demand in the for real estate. It was an
interesting scenario where FDI’s and other investors were withdrawing money on real estate
stocks on one hand and real estate prices/demand were affected negligibly in few cities on the
other hand. In few cities actually there was increase in prices during the time of economic crisis.
This leads us to conclusion that investors were seeing the market differently and withdrawal of

4. money from real estate sector by FDI and Investors were for reason beyond market demand and
and this paper figures out the reasons for the same.
Objective
This paper is a study of real estate sector on BSE/NSE in comparison to prices and demand for
real estate in the Indian market. The paper attempts to answer dismal performance of BSE Realty
stock during the economic crisis of 2008-09. The following questions arise the need to research
this topic
1. Why erosion of real estate stock prices by 90% not reflected in price and demand for real
estate in 2008-09 economic crisis?
2. Are drivers of performance of real estate stocks different from the real estate market
drivers of price and demand?
3. Is there any co-relation that exists between real estate stock performance and
price/demand for the realty in market?

5. Background
The real estate relates to the land and development above the land or underground the land
which is the built environment permanently attached to the land. India has been tremendous
growth in IT sector services, manufacturing and exports from late 1990’s till year up to date.
Indian IT sector led the torch of globalized IT services with IT companies’ revenues
increasing double digits year after year. The incomes arose at a fast pace and GDP growth
along with economic liberalization has made India a hub of economic activity. Few cities
have been instrumental in growth of this country which developed as center of IT, IT services
and manufacturing, creating new jobs and better salaries compared to other region. To name
these few cities are New Delhi, Mumbai, Bangalore, Hyderabad and Chennai. Many people
from towns started migrating to these cities and creating strong demand for housing and
commercial places. Further with rise in disposable incomes, city dwellers demanded luxury
housing, nearby commercial spaces, better schools and hospitals. Also the cities attracted
migrant and unskilled population who had better salaries and job prospects in cities
compared to their villages and towns. Indian cities created demand for mid income housing
and low income housing with better living conditions for city dwellers and migrant
population. This process of urbanization following people moving to big cities from villages
and town created stress and demand on cities to become mega cities. Demand for better
living and working standards, better schools, hospitals, roads and railways, ports and airports,
bridges and power plants. It is reported that 70% of GDP income will be generated by this
cities and this process of urbanization will continue till next three decades.
Looking at this scenario the government is planning major infrastructure capacity boost to
cities and also creating 24 new cities along the fast moving Delhi Mumbai Industrial

6. Corridor. It is estimated that around USD 1.2 trillion dollars will be needed to develop
infrastructure and create new cities in India. In the residential housing there is shortage of 26
million houses in India especially in mid income and lower income group as per reports. Also
on the commercial side hotels, commercial complexes, service apartments and entertainment
complexes will see strong demand in these cities. This growth of cities and real estate
infiltrated the entrance of new developers and builders in this business.
Introduction to BSE Realty Index - BSE Realty Index comprising of major real estate
company stocks started trading on 9th July 2007 at BSE exchange taking 2005 as its base
year and Rs. 1000 as index value. The following are the constituents of the BSE Realty Index
as of Aug 12th 2011. The stocks that are actively traded on BSE are the ones which are
selected in the index based on their trading frequency for last 3 months.
Scrip Close Full Mkt. Free-Float Free-Float Mkt. Weight in
Company
Code Price Cap. Crores Adj. Factor Cap( Crores) Index %
532868 DLF LIMITED 200.9 34,104.22 0.25 8,526.05 32.17
507878 UNITECH LTD 29.1 7,607.41 0.55 4,184.08 15.79
532873 HOUSING DEV 117.3 4,868.00 0.65 3,164.20 11.94
532832 INDBUL REAL 82.4 3,319.98 0.75 2,489.99 9.4
533273 OBEROI REAL 229 7,516.54 0.15 1,127.48 4.25
503100 PHOENIX MILL 215.3 3,118.52 0.35 1,091.48 4.12
533150 GODREJ PROP 693.2 4,842.00 0.2 968.4 3.65
532784 SOBHA DEV 233.6 2,290.77 0.4 916.31 3.46
515055 ANANT RAJ IN 63.7 1,879.76 0.4 751.91 2.84
533274 PRESTIGE 110.65 3,630.14 0.2 726.03 2.74
533160 D B REALTY 68.35 1,662.67 0.4 665.07 2.51
532780 PARSVNATH 45.55 1,895.53 0.35 663.44 2.5
512179 SUNTECK REAL 293.85 1,850.26 0.35 647.59 2.44
503031 PENLAND LTD 46.2 1,289.91 0.45 580.46 2.19
TOTAL 79,875.71 26,502.49

7. The market capitalization on free float adjustment basis for the index was 26,502.49 crores. Few
of the major companies of this index comprises of DLF Limited, Unitech Ltd, Oberio Realty and
HDIL which constitute around 68% of the market capitalization for this index.

8. Methods and Analysis
To build the analysis model a comparative chart was drawn between BSE Realty Index and
Sensex. The chart below details the performance of Realty index (Orange color) since inception
compared to BSE Sensex (Green). As one can see Realty sensex has been very volatile and since
March 2009 hit the lowest and never recovered to the mark as per initial projections.

9. Analysis of market from July 2007 to Jan 2008 – The market during this time showed
tremendous growth with bullish stock market and growth of various industries in India including
Real Estate Sector. The ASSOCHAM reported rise in disposable income of salaried class and
new multinational companies coming to India and demanding good commercial spaces and with
increase in incomes in India. FDI for Real estate that came in during 2007 – 2008 was valued at
USD 7.8 Billion. The real estate sector reaped the maximum advantage of bullish stock market
trends in 2007. Apart from DLF, other real estate players like Housing Development and
Infrastructure Ltd., Puravankara Ltd., and Nirman Ltd. raised $3.7 billion from the primary
capital markets. There were twelve public issues in 2007, which included DLF mega IPO of Rs,
9,000 crore. The preferred avenue for foreign investors has been going via the private equity
route.DLF sold 49 per cent stake in its seven townships to Merrill Lynch and Brahma
Investments to raise Rs 1,675 crore.
The private equity deals also happened at entity level. Wachovia Corp, one of the largest
financial institutions in the US, picked up 15 per cent stake in Vipul for Rs 234 crore.
As valuations plunge downward, real estate companies have been increasingly looking at FDI
compliant SPVs for different projects.
The Shapoorji Pallonji group struck a $290 million deal — the largest so far in the real estate
space — with a clutch of foreign investors. CVC International and the Government Investment
Corporation [GIC] of Singapore, along with others, picked up a 15% stake in a special purpose
vehicle [SPV] floated by the group. The following were the rationales under which FDI has
invested money into various projects in India
1. There is tremendous demand for residential housing, commercial/retail spaces and
infrastructure development in India as per research reports

10. 2. Most of the projects will have average gestation period of 3 years after which revenues
will start coming in.
3. Money invested in housing projects will have less political and clearance risk and exit
from housing projects will be easy
4. The money coming in will be used by developers for Projects approved by the FDI and
not on buying more land inventory
With the investment coming in and strong demand the companies didn’t utilize the funds given
to them appropriately. A closer look into balance sheets of real estate companies tells that money
raised during 2007 – 2008 was invested by companies in buying more land instead of working on
projects. This caused delay in construction and delay in cash flows as developers wanted
purchase of more raw material Land first which was appreciating fast and will generate future
cash flows. The result was delay in FDI approved projects and revenue coming in was slow and
unimpressive on FDI approved projected. As per figures cited by Asian Development Bank
projects in India took average 18 months more compared to China because of lack of capacity to
handle projects, engineering capabilities, red tapism and lack of planning in project
implementation. With huge money inflow stock prices surged in 2007 and real estate prices
boomed without looking at local economic fundamentals of availability of power, good
infrastructure and social infrastructure in place. Later when investors realized the long delays on
projects and incorrect allocation of resources by builders and developers they lost the faith and
starting withdrawing money from the market. A complete collapse of real estate stocks
happened; whereas fundamental demand did exist in the market. The BSE Realty index

11. plummeted to 1297.82 on 09th March 2009 the sector was back bitted with little resources in kitty
to implement projects.
A look into real estate prices from 2007 to 2011 below in various cities of India gives a different
picture showing healthy demand with marginal drop in prices in few areas ( From July 2008 –
June 2009) where as during same time few cities witnessed increase in prices. The above
behavior doesn’t show any correlation between prices on stocks and real estate prices. E.g.
Mumbai residential real estate prices increased from 117 basis points to 124 basis points where
as the stocks during same time had an erosion of 50% of value from July 2008 to June 2009. This
indicates that investors taking more abrupt measures and distrust in real estate companies over
other sector companies which have more transparency and systematic processes in place for
development. In the longer run these investors would have seen growth in their wealth had they
trusted the market fundamentals rather than taking abrupt measures signaling lack of faith in real
estate companies handling investments.
Jan- July- Jan- July- Oct- Jan-
June Dec June Dec Jan- Apr- Jul-Sep Dec Mar
2007 2008 2008 2009 2009 Mar Jun 2010 2010 2011
CITIES Index Index Index Index Index 2010 2010 Index Index Index
Hyderabad 100 96 92 65 81 81 82 87 87 83
Faridabad 100 100 121 139 145 154 152 170 176 165
Patna 100 103 100 107 119 127 124 148 146 146
Ahmedabad 100 106 100 127 128 113 131 141 164 165
Chennai 100 104 95 120 143 164 183 210 214 218
Jaipur 100 119 115 71 63 66 61 63 69 67
Lucknow 100 103 102 104 119 112 133 148 152 157
Pune 100 101 97 103 117 124 135 140 141 148
Surat 100 101 98 111 123 109 136 128 133 128
Kochi 100 106 95 90 83 79 83 97 101 86
Bhopal 100 139 151 139 162 158 153 166 173 167
Kolkata 100 114 140 162 185 165 176 191 213 211
Mumbai 100 112 117 124 126 134 160 167 173 175

12. Bengaluru 100 73 76 58 59 64 68 74 101 88
Delhi 100 124 130 121 113 106 110 115 123 126
Results
The following were things which resulted in withdrawal of money in Real Estate Sector
1. Indian realtors instead of investing money in projects; created more land banks to take
advantage of increasing prices. This cause delay in cash flows and lack of trust of FDI as
the money invested was not used appropriately for the given projects.
2. The real estate companies lacked capacity and structure to handle big projects. The
engineering and project management capabilities to handle mega projects was not built
and experienced by the companies.
3. The red tapism and government control and clearances required; caused delay in projects.
4. There was lack of planning, standard guidelines and real estate professionals who knew
best practices, international standards and experience of implementing multimillion dollar
projects.
5. There is definite correlation between Real estate stock performance and Real estate price
index but crash of realty in 2008-09 had few other reasons than market demand and
supply dynamics. The correlation coefficient exits between data collected for real estate

13. stock performance and real estate prices and calculation of these coefficient and
explanation will be theme for another research paper.
Discussion
To attract real estate investment by FDI’s and other investors the government and companies
through its Real estate association have to undergo change in doing business. More transparency
and capacity building is needed to make investors confident about the Real estate sector. Escrow
Accounts and third party performance appraisal should be mandatory for FDI approved projects
to decrease the risks as perceived by the Investors. The government need to further simplify and
reduce the clearance time by centralizing the process of clearances and making clearances at
municipal levels very simple and straight forward. Many foreign companies find it difficult to
business in India without having an Indian partner lack of structured practices and understanding
of Indian market. Also dealing with corruption, political intervention and red tapism needs a
different expertise which many foreign companies have no experience in dealing with . On the
other hand real estate companies need to first build internal capacity to experienced engineers,
project managers, designers, construction managers, building professionals, capital management
and finance professionals who have relevant knowledge and skill-set according to changing
scope of real estate industry.
A complete transparency and relationship building exercise with investors is needed to build
their faith in this sector. The money resource provided by investors has to judiciously used as per
project plans and relevant standard information about project progress and implementation along
with risk measures taken should be provided to the investors. This will reduce the cost of capital

14. which is very high for this industry as investors will be more open to investing decreasing the
cost of acquisition of money. The real estate projects are very capital intensive and only
transparency and good governance of projects can bring in better investments to this sector. Our
time for delivery will be significantly be improved with better execution and by taking above
mentioned steps which will guarantee investors better exit strategy and money rotation will be
much easier. This will significantly impact the real estate index performance and stocks will
attract investments. The experience of real estate stocks on the Sensex has been for just four year
duration and better execution of projects will improve the prices of Realty stock and make stocks
movement more in tune with the fluctuations of the sensex.

15. References
1) ASSOCHAM Eco Pulse Study – Annual FDI Report 2008 – 2009
2) ASSOCHAM Business Barometer – Future Prospects of Real Estate Sector – Oct 2010
3) FDI Consolidated Policy – March 31st 2011 - Department of Industry Policy and
Promotion – Ministry of Commerce
4) Bloomberg India
5) National Housing Bank http://www.nhb.org.in/Residex/About_Residex.php