Why Realty stocks being hammered?
The BSE Realty index had underperformed the market over the past one month till 27 January 2011, falling almost 15% compared with the Sensex’s 7-8% decline. The The BSE Realty index had also underperformed the market in past one quarter, sliding around 40% as against 7.5% decline in the Sensex.
Investor sentiment in realty stocks has been dampened as new home buyers are starting to feel the squeeze of high property prices and rising interest rates. Higher interest rates mean that it costs more for consumers to borrow money for buying a home.
To control surging inflation, RBI at its quarterly policy review on 25 January 2011, raised repo rate by 25 basis points to 6.5% and the reverse repo rate by 25 basis points to 5.5% with immediate effect. Reverse repo is the rate at which RBI borrows funds from banks.
According to recent reports, realty developers remain over-leveraged and demand for property other than residential such as commercial, retail (malls), special economic zones (SEZs) and office space remain muted. Reports suggested that around 50% of residential units sold in 2010 have been bought over by speculators as sharp price hikes kept end users at bay.
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