Real estate: Demand to rebound in second half

Tax clarity in Budget could be a game-changer for DLF, Prestige as move would improve liquidity

Consumers may have kept away from big-ticket items such as real estate and cars in recent years. However, latent demand is set to rebound in real estate in FY15, say analysts. Expectations of a demand revival and tax clarity on real estate investment trusts (Reits) are driving up realty stocks. Over the past six months, the BSE Realty Index has risen 44 per cent, while the Sensex rose 24 per cent.

Over the past three years, demand for residential projects in key markets such as Mumbai and Delhi has been weak. In fact, property registrations in Mumbai steadily contracted in 2014. In April, property registrations fell 10.5 per cent month-on-month and 20 per cent year-on-year. As a result, developers have not announced too many new projects and, instead, focused on completing existing projects. However, channel checks by analysts reveal enquiries have gone up after the election results. Demand for real estate is cyclical and when demand returns, it is always strong and analysts expect demand for residential property to come back strongly ahead of economic recovery.

Anticipating a pick-up in demand, realty developers have already started raising money for expansion. Godrej Properties has announced a premium residential project in Gurgaon, while Ansal Properties is investing Rs 130 crore to develop a special economic zone in Greater Noida. Karvy Stock Broking expects new launches of 7 million sq ft from Oberoi Realty and 6 million sq ft from Kolte Patil, which would be sufficient to prop up the western India numbers. J P Morgan believes the earlier beneficiaries are likely to be those with significant amounts of near-completion stock available, such as Oberoi, Prestige and DLF.

Also, the over-supply in retail and commercial space is over. With rents stagnating, these developments have dried up and low fresh supply will push up rents, say analysts. The Budget, too, could be a game-changer for the sector, if the much-needed clarity on taxation of REITs is announced. Analysts believe if large pools of capital have to come into low-risk annuity-earning assets, then the issue of double taxation has to be resolved.

JPMorgan believes exemption on dividend distribution tax will be key if these structures have to go through. If this happens, it will be positive for large commercial developers such as DLF and Prestige, which have assets they can pool and sell to investment companies.