Realty rally likely to continue as Street upbeat on prospects

Analysts say investors should moderate return expectations; DLF and Macrotech top picks

The BSE Realty was the best performing sectoral index over the past year, generating returns of 129 per cent. The September quarter results of leading players, registration data, and bookings are a signpost for the rally’s perpetuation. Despite sharp outperformance, brokerages have picked the sector as a key bet for the year ahead.

Goldman Sachs, which had recently downgraded India after region-leading 31 per cent gains in 2021, underscored real estate as one of its four preferred sectors. The preference comes even as it believes the risk-reward for Indian equities is less favourable at existing levels.

While there are multiple segments within the sector, including residential, office, malls and real estate investment trusts (REITs), the Street is most bullish on residential space.

Rahul Jain and Ayush Bansal of Emkay Research believe the country’s residential real estate market is set for a multi-year upcycle, given the improvements in supply dynamics as a result of industry consolidation and housing demand by virtue of enhanced affordability.

To reinforce their argument, they point out that on the supply side, active developer count has declined 35 per cent from 2011-12 levels. New supply, they say, is at 65 per cent total absorption in 2020-21. On the demand front, affordability is at a decadal high, led by low mortgage rates, tax breaks, and smaller unit configurations.

What should support the stock prices of top players have been encouraging bookings in the September quarter and property registration data. In October 2021, Mumbai recorded its highest property sale registrations in a decade.

Property consultancy Knight Frank points out that sales at 8,576 units grew 8 per cent year-on-year (YoY) over October 2020, when the stamp duty rate was at its lowest level of 2 per cent. Its Chairman and Managing Director Shishir Baijal says even without the stamp duty incentive, there have been faster deal closures on the back of multi-year low home loan interest rates, attractive property prices, and developer festival offers on new projects.

Some of the demand was reflected in the operational performance of Mumbai-based listed companies, such as Macrotech (Lodha) Developers, Oberoi Realty, and Sunteck Realty, in the September quarter. India sales bookings for Macrotech stood at Rs 2,003 crore, up 88 per cent YoY. Given the recent launches, the company is on track to achieve the 2021-22 (FY22) sales of Rs 8,500-9,000 crore.

Despite no new launches, Oberoi Realty had sales of Rs 828 crore — 2.5x more than the year-ago quarter, while volumes over this period stood at 440,000 square (sq.) feet (ft). The company is expected to hit sales bookings of Rs 4,000 crore in FY22.

Given the sales in the second quarter came from inventory liquidation in existing projects, Parvez Akhtar Qazi of Edelweiss Research believes that is a significantly positive development since Oberoi Realty had among the highest inventory levels (around Rs 9,000 crore) at the end of the June quarter, and sales bode well for future cash-flows.

New bookings for Sunteck were up 36 per cent YoY to Rs 271 crore, with collections rising 47 per cent over the year-ago quarter. The company has a portfolio of 50 million sq. ft of ongoing and future projects.

Godrej Properties reported 140 per cent YoY uptick in sales to Rs 2,574 crore, with volumes of 1.73 million sq. ft.

Bengaluru-based realty major Sobha posted its best-ever sales performance in value and volume terms. Bookings were up 51 per cent YoY and sequentially to 1.35 million sq. ft, with sales value up 61 per cent YoY to Rs 850 crore.

Prestige Estates, too, saw gross residential bookings rise 88 per cent in value terms to Rs 2,110 crore, which were ahead of analyst estimates. The sales momentum is expected to continue as the company has a pipeline of 10 million sq. ft of launches in the second half of FY22.

While both Embassy Office Parks REIT and Brookfield India REIT had a stable quarter and leasing activity, especially from the technology sector, analysts point out that recovery in the office space will be the slowest across all segments in the real estate market.

While rising steel and cement prices could have a bearing on sector profitability, analysts point out that higher volumes and robust demand would help companies pass on the cost to customers.

Although the outlook remains strong, an analyst at a domestic brokerage says investors should moderate their return expectations from the sector after a standout performance in the past year.

While there are multiple companies playing the structural upcycle in the residential segment, brokerages are optimistic about the growth prospects of DLF and Macrotech, debt reduction plans, and valuations.