India’s real estate sector may continue on a firm footing as experts hope the residential segment will report a strong rebound in the fourth quarter of FY22, after minor hiccups from deferral of home buying during the third COVID wave towards the end of December quarter.
Data shows that Mumbai alone witnessed property registrations of close to 35,000 units during the January–March quarter, which is a jump of 51 percent on-year and a sequential growth of 36 percent.
According to a report from Knight Frank, the top eight cities registered a 9 percent on-year growth in housing sales in Q4, which indicates the growth momentum has sustained across key markets.
“We expect Q4FY22 presales to largely remain in line with Q3FY22 sales (some developers may see decline, depending on miss of new launch timelines due to COVID-19 third wave),” a report from HDFC Securities Institutional Research said. Our channel checks picture a stable underlying demand, though it may vary, depending on location and developer projects, the report said.
While Q4FY22 was a muted quarter in terms of new products, experts hope to see launch momentum pick up from Q1FY23, with some of the major launches from Prestige Estates (MMR, most awaited), Oberoi Realty (Thane, long due) and Mahindra Lifespace (Bengaluru, Chennai).
“Our coverage universe is expected to deliver 19 percent YoY and QoQ growth in pre-sales in Q4FY22 and can generate collections of Rs 6,500 crore, up 17 percent YoY and 5 percent QoQ,” said a report from Motilal Oswal Financial Services Ltd.
Margins under pressure
Prices of key inputs like cement and steel have surged in the past few weeks. The prices of steel have rallied 45 percent in the past few weeks, while cement prices, though largely stable on a YoY basis, have increased by 4- 5 percent recently.
Consequently, margins in the near term are likely to remain under pressure on account of a sharp rise in commodity cost.
“The overall 15-20 percent increase in cost will require price hikes of 5-6 percent to mitigate the impact,” Motilal Oswal said in a report.
Companies will look for opportunities to increase the prices without impacting the demand as they feel that the market is buoyant and can absorb a minor price increase.
“As developers continue to focus on volumes (with minor price hikes in recent past), the current scenario of rising cost pressure, which may be short-term in nature, will further tilt the situation in favour of large developers who are better placed to pass on the inflation in raw material cost,” the Motilal Oswal report said.
Impact of impending hike in interest rates
The advent of low interest rate regime and various sops given by state governments to boost demand, the demand for residential real estate remains robust. Rising income levels, near-low mortgage rates, and stable property prices are some factors contributing to the strong demand. The rise in interest rates globally is getting reflected in the ~50bps increase in India 10-year bond yield over the last month.
“We believe that this may not result in demand destruction as affordability remains high and developers remain accommodative on pricing as most of them are holding a historical land bank,” HDFC Securities said. “While we expect property prices to rerate, it may be on the back of a more sustained economic recovery and positive sentiment on consumption.”
Office rentals and mall space
Many companies had started implementing their return-to-work strategies by January 2022 but that hit a breaker due to the spread of Omicron. Even malls and hotels saw a drop in business activity in January 2022, although it rebounded by February 2022.
For offices, re-occupancies have improved from 10-15 percent to 25-30 percent, with a 50 percent expected by Jun-22. “We believe that lease momentum may pick up from Q2CY22,” HDFC Securities said.
“Phoenix Mills had reported that consumption pattern was at 79 percent in January 2022, but moved up to 104 percent in February 2022 (compared to pre-pandemic trends),” it added.
The discounts in rent provided by malls to the shop owners have now been withdrawn and rentals are now as per the original contracts with periodic escalations.
Discounts have been withdrawn with rentals now reverting to contractual rentals with escalations. Developers have started announcing new Capex/expansion plans.
The average room rate (ARR) and room occupancy will likely improve in Q4FY22 thereby benefitting the hospitality sector which was also languishing due to COVID related restrictions.
Earnings Outlook
Experts expect the aggregate revenue of the sector to witness a growth of 17 percent. EBITDA (earnings before interest, tax, depreciation and amortization) is likely to improve by 9 percent on quarter and PAT (profit after tax) is likely to grow 6.2 percent.
Top picks for HDFC Securities are DLF, Oberoi Realty, Phoenix Mills, Brigade, Prestige, and Mahindra Lifespaces while Motilal Oswal sees potential for a re-rating in companies, which will provide growth visibility, on the back of continued business development through robust cash flow. It prefers Lodha and Oberoi Realty over DLF and Godrej Properties Ltd.
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