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Realty stocks are in the limelight. The pandemic emerged as a boon as the demand for bigger houses, higher affordability, multi-year low home loan rates and the sheer perception of bottoming out realty prices instilled charm in the real estate sector. According to a report by PropEquity, inventory levels are coming down significantly. It has hit a decadal low across top seven cities while absorption is down 21% over the past decade.
The Nifty Realty index has already outperformed the Nifty50 index with 26% jump year-to-date. By comparison, Nifty50 rallied 15% during the same period. Stocks such as Sobha (190%), Brigade Enterprises (147%), Indiabulls Real Estate (146%), DLF (138%) and Sunteck Realty (119%) have rallied more than 100% in the past one year.
The post-pandemic positive sentiment in the sector — be it residential or the office space — is giving confidence that more upside exists in realty stocks. Consolidation is going on in the residential and the office segment both.
“The residential markets are witnessing a significant clearance of inventory across ready to move in properties (RTMI) as well as under-construction properties. Also, the units which are expected to be delivered in CY21 / CY22 / CY23 / CY24 are already pre-sold 85%/68%/55%/47%, indicating limited chances of industry facing a supply overhang like in the past. Customers would also need to look for alternative units and the present RTMI inventory is expected to trend downwards across markets,” says brokerage JM Financial in a research note.
Rebound taking shape
So far as the office segment is concerned, consolidation in the office space in favour of financially strong developers is helping them gain market share, which is expected to accelerate.
“While supply will eclipse demand in the near term (leading to likely pressure on rentals), pick up in demand over the medium term is likely to ensure that the demand-supply mismatch does not get out of hand. Relatively low vacancies in tech-dominated markets and less market fragmentation render this space ideal for recovery,” says Edelweiss in a research note.
It believes that developers with strong rental portfolios such as DLF (BUY), Brigade Enterprises (BUY) and Embassy Office Parks (NOT RATED) will benefit from the likely revival in office space demand over the medium term.
JM Financial although sees the systemic pain to continue, the large developers are expected to do well with most having debt to equity of less than 1x as of March, 2021 and reporting strong sales momentum. It is positive on Prestige Estates, DLF and Macrotech Developers.
“We continue to like Prestige Estates (Rating ‘BUY’; Mar’22’TP of Rs 375) post the asset sale to Blackstone (phase 2 to be completed in the coming months) Prestige will become net debt free and is entering the MMR market with the acquisition of a large stressed project in Mulund (Rs 8250 crore sales potential). Going forward, it can significantly scale up residential as well as its commercial portfolio. Presently, things are looking up for DLF (Rating ‘BUY’; Mar’22’TP of Rs 345) and the Delhi NCR market with price increases in existing products, faster monetisation of land and ready to move in inventory leading to significant cash flows. Macrotech Developers (Rating ‘BUY’; Mar’22’TP of Rs 785) remains a bet on the MMR market and is likely to go through a deleveraging cycle backed by strong sales momentum across mid-income and luxury housing projects,” the JM Financial report says.
Global brokerage CLSA prefers top developers focused on growth, healthy profitability and prudent capital allocation. It is positive on Sunteck Realty (BUY), Prestige Estates (BUY), and DLF (upgrade to BUY from O-PF). It sees a target price of Rs 425 on Sunteck, Rs 370 on Prestige Estates and Rs 350-55 on DLF.
Earnings corner
The Q1FY22 results of real estate players are awaited. Brokerage HDFC Securities expects the aggregate revenue/EBITDA/PAT for its coverage universe to decline sequentially by 43.4/45/58.6%. However, on a year-on-year basis, it sees a growth in net sales of 247.4%, 110.6%, 85.5% and 84.8%, respectively, in Oberoi Realty, Godrej Properties, Mahindra Lifespaces and DLF. Brigade Enterprises and Sobha Developers are expected to report 72.1% and 32.5% YoY jump in net sales, respectively.
The CLSA India Real Estate Access Day reports says top developers aim to double their sales over the next three to four years, benefiting from strong demand, affordability and industry consolidation.