Fund managers believe the 50 basis points RBI rate cut should support demand for real estate, but they are unsure if it will translate into greater allocation to real estate shares in mutual fund portfolios as valuations still remain a major concern.
Mansi Vasa, Associate Fund Manager – Equity at Quantum AMC has cautioned against over-estimating the impact of front-loaded RBI rate cut.
“When it comes to interest rate cuts, in my opinion, a home-buying decision is more a function of income growth rather than just interest rate cuts. You can't look at rate cuts in isolation when deciding to buy a home,” she said.
Quantum AMC’s fund manager added that since home loans typically span 15–20 years, borrowers will experience both rate cuts and hikes. “So, there will be both cuts and hikes; it's cyclical. Therefore, mere interest rate cuts may not be a catalyst for home buying.” The fund house has no direct exposure to real estate stocks, holding them only via index allocations. “We're not looking to add more names due to the expensive valuations at which they’re trading,” said Vasa.
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Around 30 fund houses currently hold some exposure to real estate, with some mutual funds - including Bandhan AMC - overweight on the sector.
Rahul Agarwal, VP - Equities at Bandhan AMC has attributed this to improved balance sheets, disciplined developers, and selective land acquisition.
“From a macroeconomic standpoint, a rate cut generally boosts affordability, particularly benefitting marginal buyers who are more sensitive to EMI obligations. This implies that the affordable segment, too, could start gaining traction,” Bandhan AMC’s money manager said.
“A rate cut is supportive across the board - not just for home buyers but also for developers, particularly those considering increased leverage in their commercial portfolios. A reduction in the cost of capital would certainly aid them. Overall, the impact is clearly beneficial for the real estate sector," he added.
On valuations too, Bandhan AMC’s Rahul Agarwal backs real estate companies to deserve higher multiples. “Most listed real estate developers are trading at 6-7x EV/EBITDA - levels seen in cyclical or commodity businesses like oil and gas. For a sector where brand trust is essential, these companies arguably deserve higher multiples”, he said. Agarwal added that even if pre-sales or EBITDA numbers are delayed by a year or two, current valuations still leave ample room for upside.
However, not all fund managers are convinced, and some caution that the recent rally - driven largely by sentiment after the RBI rate cut and CRR reduction - may not be sustainable from a fundamental standpoint.
The Nifty Realty Index currently trades at a P/E of 51.7 and a P/B of around six. Sobha Developers trades at 53.39x, followed by Prestige Estates and Macrotech Developers (Lodha) at 45.04x and 49.85x, respectively.
Quantum AMC’s Vasa has pointed to a valuation gap between residential and commercial real estate, while highlighting that home buyers’ segment commands a premium.
“Post-COVID, the home buying rally drove up demand for new homes, which was reflected in higher sales volumes for residential companies. On the commercial side, recovery was slower due to occupancy issues during COVID, and that’s only now starting to pick up. But residential still looks stronger and is valued more at a premium,” she said.
Looking ahead, Bandhan AMC’s fund manager remains upbeat. “There could be some churn within the portfolio based on recent rallies, but our sector stance remains unchanged. From a long-term perspective, the growth outlook for real estate remains intact, and the recent policy actions should only reinforce consumer confidence,” said Agarwal.
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