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Real estate stocks have jumped 40-100% this year, what should investors do?

The BSE realty index has gained 19 percent in the past three months and over 60 percent this year so far. The Sensex has gained a little above 20 percent in 2021.

It’s been a sizzling year for the real estate sector, especially after the industry, which was already passing through a rough patch, was battered when the first wave of coronavirus hit India in early 2020 and work-from-home became the norm.

The recovery in the second half of the year, however, dispelled all the worries, pushing real estate stocks to new highs.

The BSE realty index has gained 19 percent in the past three months and more than 60 percent in 2021, while the Sensex has gained a little above 20 percent this year, which has 20 more days to go.

“The large move in real estate stocks is primarily driven by a recovery in real estate demand and the positive outlook towards the real estate sector on the back of government support like lower interest rates, tax relaxation for first-time buyers under PMAY and stamp duty cut,” said Ankit Pareek, Research Analyst at Choice Broking.

Several states cut the levy to shore up the sector as buyers initially chose to stay away with the nationwide lockdown triggering layoffs and salary cuts.

Major real estate players Godrej PropertiesSobha DevelopersPheonix MillsDLFPrestige EstatesOberoi Realty and others have gained between 40 percent and 110 percent year-to-date. These gains come after almost a decade of low returns.

Opportunity in crisis

After a knee-jerk reaction to Covid lockdowns, investors realised it was an opportune time to double down as property prices dropped.

“Real estate witnessed a blessing in disguise in 2020 as the consumer perception changed and home-buying became a priority. The pandemic and lockdown was a silver lining for the real estate sector, given it is a safe-haven and tangible asset at the time of crisis. This led to increased investment and home-buying in the last two years,” said Ram Raheja, Director, S Raheja Realty.

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Millwood Kane International’s Founder and CEO Nish Bhatt thinks the trend is here to stay.

“Many who preferred to stay in the vicinity of central business districts are now preferring to stay at a distance but (in) a spacious set-up. Data suggest that office-leasing activity has picked up ever since authorities allowed employees at the workplace. The fact remains that for residential or workplaces the amount of space required will only increase,” he said.

Decadal-low interest rates, government incentives and Covid-induced factors such as the reduction in supply coupled with steady demand helped drive growth in FY22, especially for organised players as many unorganised players shut operations after the viral the outbreak.

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Data from research firm ANAROCK showed that demand increased by 10 percent on month and 12 percent on year in October, while new launches remained weak (down 24 percent month-on-month and 47 percent year-on-year).

Unsold inventory continued to correct, falling 11 percent YoY and 3 percent on month, with inventory months decreasing to 26 in October from 37 in the year-ago period.

For 2021, so far, launches and demand are up 9 percent YoY and 31 percent YoY, respectively.

“Demand for residential properties has surged due to increased urbanisation and rising household income amid improved economic conditions,” said Gaurav Garg, Head of Research at CapitalVia. “The realty sector has also seen increase in the transparency and returns,” he added.

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What should investors do?

The big question then is: Is this shift a short-term phenomenon or a structural shift in the industry?

“Our market checks suggest that demand growth is expected to continue, and as inventory reduces further, prices of homes are expected to rise. At the same time, the industry has consolidated rapidly over the last five years and large developers have large market shares of their micro markets,” said Abhay Agarwal, Founder at Piper Serica.

Large real estate companies were the biggest beneficiaries of the Covid fallout. Ronald Siyoni, Research Analyst at Sharekhan by BNP Paribas, thinks the sector is in a structural uptrend.

“The government has been consistently providing requisite impetus on affordable housing through favourable policies like RERA, reduction in stamp duties, interest rate subventions among others,” he said.

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The monetisation of the commercial portfolio through REITs have led to freeing up of equity capital, providing further avenues of growth for commercial real estate space.

He is bullish on Mahindra Lifespace and Oberoi realty but has an “avoid” stance on Godrej Properties because of the relatively high premium to NAV valuation.

Whereas Choice Broking’s Pareek’s long-term top picks are DLF and Oberoi Realty, even though he is bullish on the entire sector.

Patricia Hou
first published: Dec 11, 2021 09:43 am