Analysts at Deutsche Bank and Spark Capital believe that the worst could be behind for the sector
After witnessing issues of slowdown in consumer demand and inventory pile-up due to affordability as well as reforms such as RERA, or the real estate regulator, market participants are now gearing up for better times going ahead for the real estate sector.
Analysts at Deutsche Bank and Spark Capital believe that the worst could be behind for the sector. In its report, Indian Real Estate, Deutsche Bank highlighted how its view on the sector is a constructive one.
Its positive outlook is placed on multiple factors viz.
1. The worst of sector-specific policy drags is behind
2. Cyclical recovery momentum is beginning to turn supportive
3. Demand-supply dynamics in the commercial segment has improved for developers and gradual bottoming out seen in residential property market.
“These drivers, combined with government’s policy push and improving corporate and consumer confidence should help the recovery in our view. We believe investors are underpricing the medium to long-term growth opportunities in a more organised and consolidated real estate industry in India,” the global research firm said in its report.
Meanwhile, Spark Capital highlighted how there was prolonged slowdown in demand coupled with increasing unsold units over the last five to six years.
“Combination of high prices, poor execution from developers (denting consumer confidence), and lack of affordable products contributed to the slowdown and eventual stress in the sector. Further, demand for new homes and launches fell to decadal lows in CY17 led by host of regulatory events such as Demon, RERA, and GST.
Going forward, it expects recovery in demand from 2017-lows, but a full-fledged recovery will be seen only in 18-24 months.
Key Positives1. Improved affordability
2. Government push and developer focus on launches of affordable homes where there is a latent demand
3. Improving consumer sentiment post RERA.
“Real estate cycles are long in nature and the sector in India has seen the worst in 2017 and from hereon we expect the recovery to be gradual at best. Top tier developers with strong execution track record, good product portfolio, and financial capability will be big beneficiaries of the changing landscape in the industry,” the brokerage house said in a report.
Interestingly, a look at stock performances shows that one stock has still managed to give phenomenal returns, thanks to the market’s constant up move in 2017. Godrej Properties returned around 180 percent between FY16 and FY18, which included periods of demonetisation, RERA and GST.
Here’s a look at which stocks are they betting on and the upside seen in those.
Brokerage: Deutsche Bank
Godrej Properties | Rating: Buy | Target: Rs 1,000 | Upside: 36%
The brokerage said that unique asset-light business model, successful pan India presence and the outlook of only a gradual recovery in residential real estate prices is likely to support earnings growth led returns in the stock.
Oberoi Realty | Rating: Buy | Target: Rs 650 | Upside: 28%
The firm is best positioned to capitalize on recovery in Mumbai real estate. Management focus on profitable & timely execution, under-levered balance sheet and diversification between residential and commercial segments as key strengths.
DLF | Rating: Hold | Target: Rs 225 | Upside: 7%
The brokerage here said that strong performance of rental business unit (Rent Co) and the deleveraging deal of GIC-DCCDL are likely to support earnings recovery ahead. The development business (Dev Co) and still challenging residential market in its core business territory may remain adverse for company's financials in the near term.
Brokerage: Spark Capital
Sobha | Rating: Add | Target: Rs 550 | Upside: NA
The brokerage highlighted how the company was a leading developer with a major presence in Bengaluru market with a ADD rating. The company has a strong execution track record reflecting in consistent positive operating cash flow performance from its development business.What works?
- High exposure to steady Bengaluru market
- Strong FY18 volumes and sales; New launch pipeline to drive sales in FY19:
- Strong track record of generating operating cash flows:
- Debt reduction appears limited; Land bank monetization remains key for reducing debt levels