Should you invest in realty as Rera comes into effect?

Investors who are looking to make a quick buck should exit, analysts say

Shares of real estate companies were in focus on Tuesday with the Nifty Realty Index gaining nearly 3% on the National Stock Exchange (NSE) in intra-day deals. By comparison, the Nifty 50 moved up 0.3% to 9,352 levels. Thus far in calendar year 2017 (CY17), the Nifty Realty index has rallied 56%, as compared with 14% rise in the Nifty 50 index.

The outperformance in CY17 comes amid multiple developments on the policy initiatives front - from the implementation of Real Estate (Regulation and Development) Act, 2016 (RERA) that came into force with effect from May 1, 2017 - to amendments in Real Estate Investment Trust (REIT) regulations and Infrastructure Investment Trusts (InvITs), which are seen as a long-term positive by analysts.

Among individual stocks, Sobha, Indiabulls Real Estate, Godrej Properties, Prestige Estates, DLF and Housing Development and Infrastructure (HDIL) from the Nifty Realty index gained between 2% and 8% on the NSE on Tuesday. Ansal Buildwell, Hubtown, D B Realty, Ajmera Realty and Kolte-Patil Developers - the non-index real estate stocks - were also trading higher in the range of 3% to 9% on the BSE.

Given the rally, analysts now remain cautious on this space and suggest investors who are looking to make a quick buck should exit. However, select counters do remain a good story from a long-term horizon, they suggest.

"I feel there are only a handful of stocks can give a good return in the long run. One should look at these stocks from a two - three year perspective. The sector is undergoing a churn given the RERA rules, which require developers to build once they have adequate cash in hand for the project. Companies with a strong balance sheet will be able to sustain and do well going ahead," explains A K Prabhakar, head of research at IDBI Capital.

Of the lot, he prefers Oberoi Realty, Mahindra Lifespace, Godrej Properties, DLF, Prestige, Sobha and Phoenix Mills.

Going ahead, analysts also expect structural changes in the property sector to force the hand of weaker developers and also raise barriers to entry. Abhinav Sinha, an analyst tracking the sector with CLSA, expects the survivors of this disruption to see large market-share gains over the next few years.

"RERA substantially increases compliance costs for new project launches, delays launches until all approvals are in place and restricts use of project cash flows. This will imply that developer ability and willingness to launch projects in the run up to and immediately post RERA implementation will reduce substantially. We expect the new launch supply to improve only by Q4CY17, as by then lowered inventory and better grasp of RERA improve developers' sentiments," he says in a recent note.

According to reports, ongoing projects have been given three months (up to July 2017) to comply with RERA regulations. The period, therefore, is likely to witness subdued activity in terms of launches as developers prepare to comply with the new norms. Considering that many states are yet to notify the rules, CRISIL Research expects a positive impact (on the real estate sector at all-India level) to be visible only towards the end of CY17.

Deepak Jasani, head of retail research at HDFC Securities, however, feels there is one more trigger left for the stocks, which is the launch of REIT after InvITs. If the IRB's InvIT succeeds, he expects more such offers from other players, later followed up by REITs. This, he says, can resolve a lot of issues for the developers in terms of liquidity and debt/leverage on books.

"Companies that have a decent presence in the commercial real estate segment will benefit as the rental yields are better as compared to those in the residential segment. For stocks of such companies, there may be one more round of rally when the REITs are introduced. Till then, the stocks are likely to consolidate but I don't think they have peaked yet," Jasani adds.

Recently, Indiabulls Real Estate proposed a demerger of its commercial property segment that sent its stock soaring. Something similar can happen in the other real estate stocks as well, going ahead, given the news flow, the interest of private equity (PE) players and other foreign funds in rental yields and expected stability in the rupee, analysts say.

"However, investors need to separate wheat from the chaff and figure out which companies will benefit from these measures / policy initiatives. Although the real estate stocks may look expensive at this point, the newsflow and policy developments may help them for some more time," Jasani believes.