Even as complete recovery for the real estate stocks is far away, the sectoral index in market has been indicating that it is trying to catch up the benchmark. The sector was already reeling under pressure when the COVID-19 pandemic battered it further.
Since the lows of March, the broader markets have staged a smart recovery, with Nifty surging over 50 percent from the level of 7,511, hit on March 24. The Realty index is 30 percent up since March 24, 2020.
Despite COVID-induced lockdown severely hampering economic activity, market consistently surged on better-than-expected June quarter earnings and on hopes of a COVID-19 vaccine.
While broader market may have reasons to rally, what pushed the realty stocks up?
In June quarter, foreign institutional investors (FIIs) increased stake in real estate by 10 bps quarter-on-quarter.
HDFC Securities, in a recent report, said the sector will be under pressure for another 12-15 months and well-capitalised and organised players will gain the most when normalcy returns.
"We believe consumption will pick up over the next 12-15 months with normalised monthly run-rate by next Diwali 2021 or November 2021. For well-capitalised and organised players, it is a blessing in disguise to be able to build inorganic assets at high cap rates, optimise and relook capital allocation and further gain market share through consolidation," HDFC Securities said.
There is some silver lining for the sector.
Media reports suggest that the COVID-19 pandemic has led to increased demand for houses in tier-II and -III cities due to reverse migration but the majority of these housing stocks consist of low rises and plotted developments.
Moreover, the government has made a countrywide effort to push affordable housing.
Experts point out that there is a pressing need to revisit the goals set by the government in the housing and infrastructure sector. Indian economy is a consumption-driven economy and resumption of purchase of houses will rekindle the real estate.
Brokerage firm ICICI Securities, in a report, said green shoots are gradually emerging in the real estate sector.
"Developers in our coverage universe have reported over 90 percent office rental collection between March-June 2020 and have seen a pickup in leasing enquiries from June 2020 onwards with few large pre-COVID deals also being honoured," ICICI Securities said.
"Rents also continue to sustain at pre-COVID levels for large, institutional landlords. With a limited number of 8-10 large pan-India office developers capable of building quality assets, India is continuing to have affordable rentals of under 1 USD/psf/month and an abundance of STEM talent," ICICI Securities added.
Stocks to look at
ICICI Securities is bullish on office asset developers and reiterated buy ratings on DLF, Embassy Office Parks REIT and Brigade Enterprises.
HDFC Securities is of the view that Phoenix Mills is well-poised to rise.
"Phoenix Mills is a derivate on richly valued underlying consumption real estate play with a vast scope for expansion. In the long run, it holds the potential for significant cash flow distribution and growth. Near-term headwinds remain, but current prices provide ‘quality at a reasonable price," said HDFC Securities.
The brokerage has a 'buy' call on Phoenix Mills with a target price of Rs 828.
Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities has buy calls on Sobha (Target: Rs 400), DLF (Target: Rs 200) and Brigade Enterprises (Target: Rs 235).
For Sobha, Oza said the current market price offers sufficient cushion on concerns over land bank valuation, even as development and contracts divisions recover from the downtime in Q1FY21.
For DLF, Oza said new launches in the development business will likely act as a catalyst for stock performance, even as performance on annuity business remains on track.
For Brigade Enterprises, Oza highlighted that there is a potential downside risk to earnings from a slow recovery in the hotel and retail mall segments of the business.
"Our Fair value works to Rs 235 which comprises of residential development at Rs 11,800 crore (Rs 58 per share), operational and under construction lease assets valued at Rs 3,800 crore (Rs 187 per share), hotel portfolio of 1,630 keys valued at Rs 750 crore and land bank valued at Rs 760 crore," said Oza.
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