The stock of Sobha Developers, a Bangalore-based real estate company, gained 12 per cent and breached ₹500 today. The stock has been on an upward trend since late February and has gained 75 per cent in the last three months.

The gain in the stock cannot be attributed to any news event. However, the market has been enthusiastic about the prospects of Bangalore-based property developers. For instance, stocks of another Bangalore-based developer Brigade Enterprises are also up 12 per cent during the day. Other Bangalore-based developers such as Prestige Estates and Puravankara are witnessing gains of 5 per cent.

Diverging markets

This is in contrast to Mumbai-based developers such as Oberoi Realty and Godrej Properties that are up a mere 2 per cent. The property market fundamentals in Bangalore are quite strong in both the residential and commercial segments. Prices in the Bangalore market have been on an uptrend in the last one year and inventory levels are reasonable. National Housing Board’s Residex index data shows that prices increased 5 per cent in the Oct-Dec 2013 quarter compared to a year ago. The city is expected to absorb 6.3 million square feet of office space in 2014 — the second highest in the Asia-Pacific region after Tokyo — according to a report by Cushman and Wakefield. Higher office space uptake bodes well for residential unit sales as well.

In contrast, the inventory levels in Mumbai are high and prices have been on a downtrend. Mumbai is likely to fall behind Bangalore in office space absorption this year.

In 2013-14, Mumbai based developers such as Oberoi and HDIL saw their revenues drop nearly 30 per cent compared to FY 2012-13, while it increased over 30 per cent for Bangalore-based developers such as Sobha, Prestige Estates and Brigade.

Stable fundamentals

In addition to the favourable local market, Sobha is also financially well situated. The company’s revenue grew nearly 17 per cent in 2013-14 and cash collections grew 33 per cent to ₹2,689 crore. The company’s operations have been cash flow positive in the last seven quarters. Debt remained almost stable during the year and the debt to equity ratio stands at a comfortable 0.6 times.

Sobha recently purchased 50 per cent stake in Puravankara’s project in Kochi for ₹326 crore. This is a key positive as it will aid the company’s growth in the coming years.

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