Valuation Risks Need Recognition and Mitigation
Not a day passes without the realty sector hitting the headlines; and not always for right reasons. A realtor kills his mother in a car and also makes believe that he was dead and gone only to surface after two years – a case reported by the media extensively during the third week of November 2013 in Andhra Pradesh. Campa Cola Compound had to face demolition after the property owners were served notice of demolition for violation of FSI five years back just during the second week of November 2013. Hiranandini Construction Company received a Court verdict of Rs.76crores leading to liquidation while its prime properties in Chennai and Panvel are close to completion. Raheja Constructions received a huge penalty and punishment handed down by the Supreme Court in October 2013 for not handing over the promised flats to the investors. The Adarsh Housing Society of Mumbai is still under CBI investigation. Many more violations are awaiting court verdicts in different parts of the country. There is governance risk, reputation risk and market risk. One may ask: where is the valuation risk in all these deals? It is hiding deep in the skin of the sector. The reader may recall that the raison de ‘etre of recession was the subprime lending led by credit rating exuberance and inflated valuations. The resultant global recession is still staring at us.