Up to 220% rally in 1 year! Here's why you should invest in real estate stocks now

With the waning of the second Covid wave coupled with low-interest rates, real estate stocks have been buzzing in the domestic equity market ahead of the festive season. Already, at least five components of the BSE Real Estate index have more than doubled investors wealth during the past year. With a rally of 266%, Mahindra Lifespace Developers emerged as the top gainer in the index. Shares of the company have jumped to Rs 274.80 on September 22 from Rs 75.02 on September 23 last year.

Sobha (up 220%), Indiabulls Real Estate (up 177%), DLF (up 145%), Brigade Enterprises (up 143%) and Godrej Properties (up 125%) stood among other major gainers. On the other hand, the BSE Real Estate index has advanced 117% during the same period. Amid the ongoing rally in the real estate stocks, the index has also managed to break 10 years-long consolidation.

Market watchers believe that interest rate cut on housing loans coupled with the reduction in stamp duty for registration in key markets including Maharashtra and Karnataka further aided sentiment. ICICI Securities believe that real estate companies may witness record sales booking numbers in the second half of FY22 led by new launches.

“While initial expectations were for new residential launches to commence from October 2021 to coincide with the beginning of the festive season, the waning of the second Covid wave, record-low mortgage rates and strong hiring/salary growth in the IT/ITes sector has led to developers preponing many launches to Aug-Sep’21 which have seen strong buyer demand,” the brokerage said adding this momentum to be carried forward into Q3FY22 (festivals of Dusshera and Diwali) and expect developers to post record sales booking numbers in H2FY22 led by new launches.

Other listed players including Oberoi Realty, Sunteck Realty, Prestige Estates Projects, The Phoenix Mills have also gained between 59%-81% since September 2020. The benchmark BSE Sensex has advanced 56% during the same period.

New project launches

Of late, real estate developers witnessed strong response to new launches in Aug-Sep 2021. For instance, Godrej Properties sold Rs 580 crore of inventory at Phase 2 of its Woods, Noida project on the day of launch. Likewise, Prestige Estates was able to sell over 800 plots spread over 1.7msf at Rs 5,000/psf or
a sale value of Rs 850 crore in Sep’21 at its “The Great Acres” project, which is part of The Prestige City project (12.8msf) in Sarjapur, Bengaluru. Another listed player, Brigade has launched 12 new projects across 4msf in Aug’21 (including new phases in existing projects) at its virtual Brigade Showcase event across Bengaluru, Hyderabad and Chennai and the company has been able to clock monthly sales of over Rs 400 crore each in Aug-Sep’21.

Sunteck Realty has also seen an encouraging response to its recent Vasind launch in the eastern suburbs of MMR and market watchers expects Rs100 crore of sales bookings from this project in Q2FY22. Industry watchers also added that Mahindra Lifespaces’ recent Happinest launch in Chennai has seen sales of over 200 units with an average ticket size of Rs 40 lakh within a month of launch.

What’s next?

There are expectations that listed players may continue to gain market share on the back of a strong balance sheet and access to capital. With the shutdown of many unlisted or weaker players, the market share of large organised developers is set to grow further in the next 2-3 years.

Consolidated net debt of top 10 listed developers in India (ex-REITs) has come down by 37% to Rs 27,400 crore between Mar 2020 to Jun 2021. This has been achieved through a combination of reduction in the cost of debt by 80-160bps, 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.

“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-three years which will lead to market share gains assuming that industry size remains stagnant. We estimate that the pan-Indian residential market share for our coverage universe will grow from 25% in FY21 to 29% in FY24E,” ICICI Securities said.

Stocks to buy

While the overall realty sector in the country, especially the unlisted space, continues to grapple with high cost and quantum of debt, listed developers’ balance sheets have become leaner and puts them in a strong position to invest for growth in the medium term and is likely to accelerate the pace of consolidation in the sector.

Considering the ongoing momentum in the sector, brokerage ICICI Securities suggested stocks like DLF, Oberoi Realty, Brigade Enterprises, Sunteck Realty and Mahindra Lifespaces from the real estate sector.

On the other hand, Angel Broking has a ‘Buy’ rating on Sobha with a target price of Rs 870. “Companies 70% of residential pre-sales come from the Bangalore market which is one of the IT hubs in India, we expect new hiring by the IT industry will increase residential demand in the South India market. We have seen a strong consolidation among listed players in India, post demonetisation, RERA, IL&FS crisis. Listed players have gained market share in new launches in the last 2-3 years, we expect this to continue in coming quarters. Ready to move inventory and under construction inventory levels have moved down to their lowest levels. Customers are now having a preference towards the branded players like Sobha Developers,” Angel Broking said.