Real Estate IPO’s ready to hit the Markets….

There are newspaper reports that a lot of real estate companies are readying themselves to tap the IPO market in view of the changed sentiment in the markets. When investors turn greedy we have companies/ investment bankers ready to capitalise on that greed. Now lets for a moment stay away from the market irrationality and think like a rational human being. Lets understand the nature of the real estate business rather than be carried away by the noise in the markets. Investing is all about buying a good sustainable business which is easy to understand and which is run by a credible management. Then comes the different characteristics of the business like, strong brand, distribution network, pricing power, moats around the business etc. Lets deal with the first aspect of the real estate business: Is it is easy to understand? This is where I disagree. It is an illusion if you believe that it is a business you understand. They possess land banks which are valued and reflected in the balance sheet. Does anybody know the real value of the land banks? I doubt. In our country it is a known fact that cash money changes in real estate deals, wether you are buying land or an appartment. In such a scenario can we truly assess the value of the land banks? Then what is the authencity of the balance sheet of the real estate company? Is it giving a true and a fair picture? As a value investor the balance sheet is the only document an investor can rely on. If that is misleading how does one know the real value of a real estate company? How are Investment Bankers able to value such companies? Corporate governance issue? In spite of this we have fund managers (qualified)of mutual funds making big investments in such real estate companies. This is reported in various newspapers thus adding credibility to the issues. This should not be the guiding post for genuine value investors as they got to understand that these mutual fund managers are investing other peoples money. What incentives are given to them is anybody’s guess.  So do not be carried away by the hype of these real estate companies IPO’s. The markets are hot and this is the best time to dump their stocks at ridiculous valuations on you. Never chase a fancy in the market as you always end up paying a fancy price. Investors need to understand that investing in real estate as an asset class is very different from investing in to a real estate company. It is this misconception that makes investors flock to real estate companies IPO’s.

2 Comments

  1. As usuall nicely written and good advice to retail investor who are usually swayed with rapid rising means volatile stock movement and are expecting only quick gains from ipos and real estate stocks .When i read your book value investing and behavior finance ,you criticised lot of time in each chapter about buying IT stocks at the time IT bubble in 2000 when valuation becomes extreme and irrational but now these stocks when corrected 90% from maniac levels are proving to be good value buy as these hold lot of cash in their balance sheet ,good business model as you state in your writing these days .i would like thank to you and your team at ppfas for guiding small onvestor like us about this game of investment..
    I want to ask question at this
    1.What level of cash do u advice to retail investor to hold in their portfolio at this euphoric or irrational level when gush of liquidity is propelling the market.
    2.As recomended lot of time by you,timing the market should be avoided ( Ref : Time in the market rather ,timing the market) but at these levels of euphoria how can a person hold his nerves at entery or exit in the stocks .when comparing with march levels of stocks and market ,it looks expensive and lot of noise about correction is about to come but liquidity is propelling the mkt higher .now real question whether one shold stay in market or exit from here.
    With Regards
    Randeep singh

  2. I totally agree with Mr Parikh as always.One thing I haven’t seen changing in last one and a half year of gloom that is people willingness to buy a house ..except govt employee.The boom of IT workers have fizzeled out and they r finding it economical to stay in rental accommodation than to buy a house. U r getting a three bedroom flat on rent in half the cost of emi..because when u buy everybody wants to milk u ,right from the builder to govt. So resultant less buyers…and these realty players are not resellers…and they don’t mind India going down like American way.So friend beware everybody cannot be DLF like(lucky)

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