Housing demand to stay; Jefferies upgrades Mindspace REIT, downgrades Prestige, Sobha

The leasing uptick for offices in late 2023 has driven vacancy levels lower; though still ~6-7 percentage points above pre-COVID levels.

The positive trend in the housing demand will likely stay intact in the calendar year 2024, global brokerage firm Jefferies has said, adding the residential market volume surged 20 percent in 2023, doubling over the past three years.

There is a significant headroom for volume growth in the medium term after a seven-year weak phase, the brokerage said in January 8 report. Jefferies expects a 10 percent on-year growth in housing volumes despite an expected cooling of the pace.

The upcycle has been led by premium property sales. The share of premium housing has risen by 14 percentage points since 2019, while rising interest rates dragged affordable home sales.

Jefferies, however, expects a shift in demand towards the mid-end and affordable segments in the second half 2024 as mortgage rates fall.

‘Raise prices but in a disciplined manner’

It’s important for realtors to undertake disciplined price hikes for the residential cycle to continue, given low rent yields. Sharp price jumps drive buyers away as affordability declines and also lead to weaker quality supply, it said.

“It may also risk attracting regulatory action, with for example, RBI recently tightening consumer lending regulations a case in point. We remain watchful,” the brokerage said.

Developers have little room for error, it warned. As the Nifty realty index has surged 127 percent from March 2023 lows, valuations of most realty stocks are at their highest levels.

Strong growth and discipline is supportive, but high expectations - given the current valuations - leaves little room for disappointment, it said.

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Which realty stocks to buy, sell?

Godrej Properties and Sunteck Realty are among the companies better placed on valuations and are the brokerage’s top large and midcap picks.

Jefferies has downgraded Prestige Estates Projects to “underperform” but raised its price target to Rs 1,000 a share, up from Rs 750.

Sobha , too, has been downgraded to “hold” but with a higher target price of Rs 1,265, up from Rs 900. After the recent rallies, Jefferies awaits better entry points.

The leasing uptick for offices in late 2023 has lowered vacancy levels, though they still remain around 6-7 percentage points above pre-COVID levels.

The relaxation in SEZ rules should drive improved flexibility for large office holders. Rental uptick is still only back-ended, at best, with NCR/MMR and central business districts leading the upturn.

As a result, Jefferies has upgraded Mindspace Business Parks REIT from “hold” to “buy”, with a target price of Rs 365, implying an upside of 12.5 percent. On the NSE, Mindspace REIT was trading flat at Rs 324.75.

As of 10.15 am, shares of Prestige Estates Projects were trading at Rs 1,337.55, higher by 0.6 percent, while Sobha was around the mark of Rs 1,301.75 per share on the NSE.

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