Bull run to continue for realty shares, analysts advise buying the dips

Shares of realty firms have retreated on the bourses recently in line with the correction in the broader markets. Real estate developers Sunteck Realty, Sobha Ltd and Brigade Enterprises have plunged 14 per cent, 10 per cent and 7 per cent, respectively, on a month to date (MTD) basis. Others such as Godrej Properties, Mahindra Lifespaces and DLF have shed 5-8 per cent.

At the index level, Nifty Realty too is down 2.3 per cent MTD against a 0.9 per cent decline in the benchmark Nifty 50.

Analysts, however, maintain optimism on the sector and suggest using the current weakness to accumulate select stocks from a medium term given a robust demand outlook supported by subdued inventory.

"Real estate inventory has fallen sharply in the last couple of years and it will take time for this to replenish. This coupled with a strong economy, RBI's likely rate cut will lead to a ramp up in projects by companies and improve sales momentum, particularly for organised developers,” said Nuvama Institutional Equities analysts Parvez Qazi and Vasudev Ganatra in a note.

Moreover, after a sharp rally in FY24, which has seen the Nifty Realty index soaring more than 128 per cent against a 26.7 per cent jump in the Nifty 50, any correction in the shares provides good buying opportunities, analysts believe.  

“One can hold and even add at current levels as an oversupply situation in realty projects is not in sight. Stocks could see even sharper run-up ahead, thus, any correction now provides great entry points," said Varun Saboo, Head, Equities, Anand Rathi Shares and Stock Brokers.

Saboo said he prefers mixed use developers so that one can also benefit from interest rate cuts. He recommends buying DLF, Brigade Enterprises and Arvind Smartspaces.

Robust outlook

According to the report by Nuvama Institutional Equities, housing demand in India’s top seven cities rose by 20 per cent year on year in February.

Demand increased the most in Kolkata, surging 62 per cent YoY followed by the MMR and Hyderabad (up 46–52 per cent YoY each) in Feb-24. While demand was also up by 25 per cent  in Bengaluru, it declined 45 per cent YoY in the NCR during the month.

Moreover, the unsold inventory was down by 6 per cent YoY with inventory months falling to 15 in February, 2024 from 20 in February 2023. Accordingly, average prices also rose up to 20 per cent YoY in Bengaluru, Chennai, Pune, Hyderabad and Kolkata, while the prices were down 10 per cent YoY in the NCR, the report said.

Given the low inventory levels and firm demand ahead, any potential for sharp corrections ahead in realty stocks remains unlikely, according to Palka Arora Chopra, Director at Master Capital Services.

Investment strategy

That said, given the strong rally seen over the last year, analysts suggest keeping valuations in mind while stock-picking. Notably, the Nifty Realty is currently trading at a price to equity multiple of 54.7 times on a one year trailing basis, above the 2-year average PE multiple of 49 times, shows data.  

Arora of Master Capital Services said that investors should adopt a balanced approach, going for profit booking where valuations are stretched, and buying additional shares in companies with strong fundamentals.