Moneycontrol PRO
Upcoming Event:Attend Algo Convention Live, 2 Days & 12+ Speakers at best offer Rs.999/-, exclusive for Moneycontrol Pro subscribers. Register now!
you are here: HomeNewsSector

Real estate sector sees reversal in downtrend. Brokerages prefer these 9 stocks

Conflation of several factors such as improving sales, market share gains and rising real estate prices augurs well for listed real estate developers.

Representative image

Representative image

 
 
live
  • bselive
  • nselive
Volume
Todays L/H
More

After years of sluggishness, the real estate sector is finally rising to the occasion with strong momentum in demand being witnessed across regions, especially in the residential space. Most players have significantly reduced their inventory and new projects are getting announced which instills confidence in the sector.

For long, the sector was impacted by multiple factors including demonetization, GST, corporate governance issues as there were widespread defaults by many of the builders, customers losing their hard earned money in projects that never got completed, RERA and crisis related to DHFL among others.

But slowly and steadily the sector is able to overcome these issues and break the shackles to witness reversal of trends.

As per industry experts there are quite a few reasons for the revival of demand in the sector. “Upcycles are driven by rising income levels, narrowing of the rental yields and interest rate corridor gap, structural changes like market share gains by organised players, wealth effect, joint family nuclearization and confidence in strong economic growth”, a report from HDFC Securities said.

Strong Sales momentum

Close

According to a report from Kotak Institutional Equities, “residential real estate across India saw sales of 195 million square feet, registering the strongest quarterly sales over the past decade with a growth of 17 percent year on year”. The previous best quarter was Q4FY11 when the sector had clocked 174 million square feet of sales.

“Geographically in the trailing twelve months (TTM), sales momentum was strongest in Hyderabad (+35 percent YoY) followed by Bengaluru (+20 percent YoY) and NCR (+16 percent YoY) even as Mumbai (+8 percent YoY) registered weaker performance in Q2FY22”, said Kotak in its report.

Before the pandemic, the developers were sitting on a huge unsold inventory but to fuel growth at the time of pandemic, various state governments implemented cuts in stamp duty, interest rates were curtailed significantly to improve liquidity which was complemented by discounts from the developer’s side. Things got a further boost by the bull run witnessed in the equity markets, gains from which got invested in home buying.

Experts are of the opinion that new project launches, diversification, industry consolidation and market share gains will help the sector to remain buoyant at least from the near to medium term perspective.

Consolidation and geographical shift to help gain market share

A large number of buyers have now become apprehensive about completion of under-construction projects by Tier-2 developers. The collapse of the tier-2 developer ecosystem is changing the supply chain, with competitors becoming partners and land bank suppliers.

“The formalisation of the sector could make tier-2 developers partners (vs. competitors), leading to market share gains for tier-1 developers”, said HDFC Securities in its report.

Data shows that major players in the listed space are looking to expand to new regions to limit the risk due to concentration in a limited area.

“Major realty developers such as PEPL, Oberoi Realty, Sobha and Lodha are looking to expand geographical footprint while others such as DLF and Sunteck are expanding product offerings to capture a larger pie of the opportunity”, a report from Edelweiss Research said.

This clearly shows that consolidation and market share gains for organized developers are at play.

Edelweiss’ channel checks suggest that in CY21, top-10 developers accounted for more than half of overall launches in the NCR, Chennai and Kolkata.

Rise in realizations and new launches

The national capital region saw new project launches of about 6.8 million square feet in Q3FY22 with Gurugram accounting for 53 percent of launches followed by Noida at 24 percent.

“Blended realizations in NCR increased 13 percent YoY to Rs 7,530 per sq. ft in Q3FY22, led by a 4 percent YoY increase in Noida, 5 percent YoY increase in Greater Noida and 8 percent YoY increase in Ghaziabad”, said Kotak in its report.

Mumbai Metropolitan Region (MMR) saw a sequential increase of 18 percent in new launches at 22.1 million square feet. Thane led the new launch space as it constituted 52 percent of total new launches while Mumbai’s share stood at 38 percent.

Kotak pegs the realization in MMR at Rs 10,929 per square feet with a YoY growth of 8 percent.

The launch activity in Bengaluru dipped in December 2021 to 2.3 million square feet after having remained weak over the past one year and declined by 20 percent YoY to 35.3 million square feet in TTM. Realizations increased by 6 percent YoY to Rs 6,183 per square feet in Q3FY22.

Data showed that new launches grew the most in Hyderabad with a YoY growth of 41 percent, Pune witnessed on year growth of 19 percent, Chennai witnessed a decline of 9 percent on year while the new launches in Kolkata remained the same as last year.

Reduction in unsold inventory

According to the report from Kotak, net unsold residential inventory in NCR stood at 181 million square feet as of December 2021, declining by 8% YoY and equivalent to ~4 years of sales (based on TTM). Greater Noida houses 36 percent of unsold inventory at 65 million square feet in NCR followed by Gurugram at 25 percent and Noida at 17 percent at 46 million square feet and 31 million square feet, respectively.

MMR witnessed a sharper decline in inventory among all regions, although outstanding inventory still remains the highest at 239 million square feet as of December 2021 (down from 272 million square feet in December 2020).

Weakening launches in Bengaluru, on the back of strong sales momentum, has led to a decline in outstanding inventory to 122 million square feet (-19 percent YoY) by December 2021 and is equivalent to ~2 years of sales (based on TTM).

In Hyderabad however, outstanding inventory increased to 121 million square feet (+16 percent YoY) in December 2021 and is equivalent to ~1.5 years of sales (based on TTM).

Asset light model to boar fruits

The organized players have significantly deleveraged in the past few years and companies are pursuing new growth opportunities through an asset-light way of joint development or land JVs. “Companies are focusing on maximising IRRs vs. earlier focus on maximising pricing and profits. This shall help in upfronting cash flows and lead to stronger balance sheets”, a report from HDFC Securities said.

Possible Risks

However, the possibility of reversal of low interest regime looms large and can create some headwinds for the recovery in demand which is still at a very nascent stage.

Inflation is another key risk since it may drive input cost and mortgage rates higher and derail the recovery. “We still believe that developers have headroom to absorb inflation as greater transparency over time has reduced costs of capital and organised developers enjoy 25-30 percent lower funding costs than tier-2 players”, a report from HDFC Securities said.

Kotak on the other hand suggests that these issues may not play out owing to continued market share gains and rising real estate prices.

Investment Ideas

Experts are of the opinion that the recent correction in realty stocks has made them attractive from a medium-term perspective.

Kotak believes that conflation of several factors such as improving sales for the sector at large, market share gains for organized developers and rising real estate prices augurs well for listed real estate developers.

“We believe Bengaluru-based players are better positioned to capitalize on the growth story in the sector and we continue to like Prestige Estates, Brigade Enterprises and Sobha. Mumbai-based players Macrotech and Oberoi Realty continue to offer value at current price points”, Kotak added in its report.

Edelweiss prefers land bank owners such as DLF and Sobha for which it has a ‘buy’ rating and has upgraded Godrej Properties to ‘buy’ considering its appealing valuation post-correction.

Top picks for HDFC Securities are DLF, Oberoi, Phoenix Mills, Mahindra Lifespaces, and Brigade Enterprises.



Download your money calendar for 2022-23 here and keep your dates with your moneybox, investments, taxes

Gaurav Sharma
Sections
ISO 27001 - BSI Assurance Mark