Bargain hunters send realty shares shooting; is the bear phase for the sector over

By Saikat Das

Realty shares extended their winning streak on Thursday, with shares like Indiabulls Real Estate, Sobha Developers, HDIL and DLF rising between 2-4.5% in morning trade. The renewed buying interest in these stocks comes amid media reports that property sales in key markets like Mumbai and Delhi have been declining over the past few months, due to high real estate prices. In addition, rising interest rates could further dampen demand for residential property in the coming months, feel some market participants.

But traders and some market operators see the stocks as good bargains, as they feel there is too much pessimism built into the share prices at current levels.

Shares of real estate developers have underperformed the broader market for over a year, even when property prices were on an uptick. So it seems a bit strange that these stocks are rising when the outlook on property prices has turned bleak.

"These stocks are rising largely on speculation, VV Sastry, chief research officer at Firstcall India Equity told moneycontrol.com.

"Fundamentally there is not much of a change. Some of the builders still enjoy a lot withholding capacity, and prices as such could stay high.  But buyers' affordability is limited as they are spending more due to high inflation," he said.

Moreover, with banks cutting back on lending to the real estate sector, delivery schedule of many projects could be in jeopardy, thus making potential buyers even more wary.

"Even if interest rates peak out, there are issues with the banks, who are not confident about taking exposure in real estate companies. Banks look worried about company financials. Sales volumes are unlikely to pick up in the near future," said SP Tulsian, CEO, tulsian.com.

The question then is whether the recovery in real estate stocks is for real. It may be too soon to say. But bargain hunters seem to be following the logic put forth by brokerage house CLSA in its recent report on the realty sector.

The brokerage has said that property prices in key markets could soften because of poor demand. This in turn could force developers to lower prices, and result in higher sales, albeit at reduced prices.