Realty check: Prestige to Sobha, south Indian developers hold the edge

Prestige, Sobha top picks given their exposure to Bengaluru, other southern markets

The NSE Realty index was the best performer among sectoral indices in CY19, with returns of 28.5 per cent. The returns from the Nifty during this period stood at 12 per cent. 

The implementation of the goods and services tax, the Real Estate Regulation Act, demonetisation as well as liquidity issues, led to market share gains for organised players. 

Improving balance sheets and track record of executing projects have helped organised developers notch up strong volumes even as smaller players are facing a liquidity crunch and slow sales velocity. Lower net debt and leverage ratios have also helped to attract investors into this sector. 

Within the realty pack, three of the top four players with highest returns are Bengaluru-based including Prestige Estates Projects and Brigade Enterprises. 

The returns from these players were in the 40-60 per cent range. Going ahead analysts believe that South-based players are better placed than their peers in the rest of the country due to better demand situation.  

While inventory levels have improved for most Indian cities, inventory overhang is the lowest for Hyderabad, Bengaluru and Chennai. In the commercial segment last year, vacancies in the three cities are in single digits (5-9 per cent) while for rest of the major markets it is in double digits. Mumbai and NCR recorded vacancies of 17-18 per cent. Analysts at Antique Stock Broking say that the three cities are mature real estate markets with their growth driven primarily by the software sector and end-user demand. The brokerage expects growth to continue in the near future. 

By BS Research Bureau

Within the listed space analysts prefer Prestige Estates and Sobha. With high rate of leasing and continuing demand for commercial offices, Bengaluru residential market is expected to perform better than the other markets in the near future helping Sobha which has over half its inventory and new launches coming from this market. Analysts at Morgan Stanley believe that there is significant value in Sobha’s large land bank 203 million square feet in attractive city markets such as Bengaluru, Kochi and Chennai.

Prestige Estates, the best performing realty stock in CY19, is a play on both the residential and commercial segments with 12 million square feet of office and retail assets. With 11 million ongoing and planned additions, the company has a portfolio of steady rental revenues with estimates pegging its FY20 rental at around Rs 1,000 crore. 

With new launches adding to the existing revenue streams and leverage levels expected to fall to around 1.25 times from 1.75 times in FY19, earnings growth is likely to be strong.