Affordable housing, RERA among key triggers for real estate in 2018

Brokerages remain bullish on sector; Godrej Properties top pick, followed by Prestige and Sobha

The BSE S&P Realty Index was the biggest gainer in 2017, more than doubling investor wealth. While the sector may not generate the 106 per cent returns it achieved last year, brokerages continue to be bullish on the sector and expect select stocks to do well on the back of sector consolidation because of the Real Estate (Regulation and Development) Act (RERA), government thrust on affordable housing and expectations of a demand upturn after sluggish performance over the past few years.

Analysts at ICICI Securities say that with the implementation of RERA picking up pace, they expect larger organised developers to gain market share in the residential space and also be able to augment their land bank at reasonable valuations. The other trigger is the government’s housing for all scheme with approval given to more than 6 million houses. This, coupled with home loan subsidy of about Rs 250,000 will help reduce the cost of purchase and improve affordability, especially for houses with value less than Rs 5 million. With property prices nearly stagnant for five years, mortgage rates at almost 22-year lows and steady per-capita income growth at round eight per cent, buying a house is now more attractive for end users than it has been at any time in the past 20 years, say analysts at CLSA.
 

The brokerage believes that companies such as Godrej Properties, Sobha and Prestige Estates will benefit, given volume orientation, flexible business models and proven execution track records resulting in substantial market share gains. 

Godrej Properties, which is a key pick for most brokerages, had a strong first half in FY18 with the June quarter volumes its highest ever and sales value of Rs 15 billion, about 75 per cent of the total FY17 sales value. With debt under control and the launch pipeline remaining strong, the company, given its strong brand, is expected to gain more market share in the top Indian cities over the next couple of years. Bengaluru-based Prestige Estates is also on a strong wicket, given robust annuity sales from its portfolio of rental assets which is expected to generate revenues of Rs 8-9 billion and Rs 71 billion of surplus cash flow from ongoing projects over the next few years. This, coupled with other retail and residential assets, should keep the revenue momentum strong. Sobha is expected to benefit from improving pace of sales bookings and healthy collections. This, coupled with a strong launch pipeline, as well as land bank additions at reasonable prices, should keep cash flows steady and improve revenue visibility.