As coronavirus hits demand for real estate, DLF does a strategy rejig

DLF projects a weaker financial performance in this quarter, owing to strict lockdown restrictions during April and much of May.

In the March quarter, DLF’s revenue and operating earnings dropped 32-40% from the year-ago. Booking cancellations in one project adversely impacted sales in the fourth quarter.

DLF projects a weaker financial performance in this quarter, owing to strict lockdown restrictions during April and much of May.

“Q1 FY21 is expected be a washout, owing to the extended lockdown and lack of short-term visibility for the buyers," DLF said. “We anticipate that some semblance of normalcy will return towards Q3 FY21."

Given the circumstances, the realty company’s office rental business held up rather well. Most rents were collected in April and May, the management told analysts.

“Management believes that ‘work-from-home’ may have marginal impact on demand, but de-densification will create demand for additional office space. So, overall, the company doesn’t expect any significant hit on office demand," Edelweiss Securities Ltd analysts said in a note.

The retail segment, which constitutes malls and other sub-segments, however, was hit. With malls shut, DLF was unable to collect all rents. But since malls were expected to gradually open in June, the situation can improve.

With the demand environment uncertain and consumer sentiment weak, the company is making bigger changes to its real estate development business. “DLF plans to start sales early in the construction stage (plinth level) for its residential projects, possibly from late FY21. This is a significant change for DLF which last pre-sold apartments ~5 years back," Jefferies India Pvt. Ltd analysts said.

The strategy will help DLF secure sales and cash flows in the current uncertain environment. It has ₹2,500 crore of cash and aims to lower the cost of debt in the near term.

Combine this with the cash flows from the planned early monetization of projects, DLF can withstand the current market conditions better, said analysts.

What is crucial, however, is stabilization of the economy and market conditions. A prolonged economic downturn can hit consumer sentiment and delay recovery timelines.

“To keep the cushion of comfortable liquidity, the company (DLF) is adopting the conventional strategy of sales," Antique Stock Broking Ltd said in a note. “Although these projects are expected to be in premium and mid-income segments, the sales velocity of these projects would depend on the prevailing market sentiments."