Residential real estate set for an upcycle; top picks from the sector

It seems like the consolidation in the real estate stocks is slowly and steady is getting over. The BSE Realty index has almost doubled to 3,364 compared to 1,717 a year ago. However, it is still 75% below its all-time high of 13,848 that it hit on January 08, 2008. The uptrend in real stocks is primarily driven by a structural shift in the sector from unorganized players to organized players. For instance, the market share of the Top-10 listed developers has increased from 11% in 2011 to 27% in 2020 and is expected to improve further from here.

“Heading into the festive season in India in H2FY22, listed developers have lined up a number of launches across Tier I cities. Low mortgage rates, stable property prices and robust hiring outlook for IT/ITeS and financial services, especially in South India and continued Work-from-Home is expected to support residential housing demand,” said ICICI Securities in a note.

Market share gains

The brokerage firm is of the opinion that with healthy balance sheets, access to capital and many unlisted, weaker developers being shunted out of the market, the market share of large organized developers is set to grow further in the next 2-3 years.

Most developers in the listed space have aggressive launch plans from H2FY22 onwards and are looking to grow at a double-digit sales value CAGR over the next two to three years which will lead to market share gains assuming that industry size remains stagnant.

It believes believe that the old adage of ‘A rising tide lifts all boats’ may play out in the residential space with an improved demand outlook leading to many large unlisted developers and smaller developers with few projects also looking to jump into the fray and trying to complete with Tier I developers by offering projects at lower prices in the same micro-market.

Declined debt levels

According to ICICI Securities analysis of listed developers of its coverage universe (ex-REITs) have been able to bring down their consolidated net debt levels by 37% to Rs 27,400 crore. “This has been achieved through a combination of reduction in the cost of debt by 80-160 basis points, reduction in corporate overheads by 20-40% from pre-Covid levels, operating cash surpluses, asset sales and equity capital raises either through the QIP route or through dilution at the SPV level,” said Adhidev Chattopadhyay of ICICI Securities.

Top picks

The brokerage firm is bullish on DLF, Oberoi Realty, Macrotech Developers, Prestige Estates, Godrej Properties, Brigade Enterprises, Sobha, Sunteck Realty and Mahindra Lifespaces among the listed real estate developers.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)