DLF, Godrej Prop: Realty stks still have room to build gains, say analysts

The pause, even if temporary, in the interest rate cycle is a positive development for the real estate sector and should see an increase in home-buying

The overall positive sentiment in real estate stocks is likely to remain intact over the next three – six months amid bouts of volatility and selling, said analysts, who suggest a pause in the Reserve Bank of India's (RBI's) interest rate cycle – at least for now – is likely to provide the much needed support.

Since the RBI policy on April 6, the Nifty Realty index has surged 7.3 per cent as compared to 0.4 per cent rise in the Nifty50 till April 10.

G Chokkalingam, founder and head of research at Equinomics Research & Advisory sees another 15 per cent rise in quality realty stocks from here on in the next six months. The interest rate cycle, he believes, is nearing its peak, which he said augurs well for these stocks.

"The pause, even if temporary, in the interest rate cycle is a positive development for the sector and should see an increase in home-buying. Developers, too, have seen a good demand for their offerings. That apart, I expect institutional investment via REITs, private equity funds etc. to go up going ahead. All this is good for the developers, which in turn can see their fortunes shine at the bourses. Quality realty stocks can see another 15 per cent upside from here on," he said.

Institutional investments in real estate, according to a recent Colliers India report, remained strong during the January - March 2023 quarter at $1.7 billion led by office sector, which accounted for 55% of the total investment inflows during this period and was higher by 41 per cent year-on-year. This was followed by residential sector at 22% share.

The residential sector, too, saw a fair share of activity in Q4FY23. Realty major DLF, for instance, sold 1,137 luxury apartments, priced Rs 7 crore and above, in its housing project in Gurugram for over Rs 8,000 crore within 3 days in February.

According to ANAROCK Research, nearly 364,900 residential units were sold in calendar year 2022 (CY22) as against 236,500 units in 2021 across the top 7 Indian cities of Mumbai, Delhi, Hyderabad, Kolkata, Ahmedabad, Bengaluru and Chennai – a year-on-year (YoY) rise of 54 per cent.

Yadhu Ramachandran, a research analyst tracking the sector at Geojit Financial Services says that the sudden spike in demand for luxury residential homes is mostly on account of the cap in long-term capital gains tax (LTCG) deduction post April 2023.

"The demand for luxury residential homes is likely to dip once the new rules take effect. We have a ‘neutral’ view on the realty sector from a short-term perspective given the overall slowdown in the economy and high interest rates. We remain stock specific and are positive on Brigade Enterprises. The upside potential, however, remains limited," he said.

That said, the Nifty realty index has performed mostly in line with the Nifty 50 index thus far in CY23, thanks to the surge seen since the April 06 RBI’s monetary policy, ACE Equity data shows. Indiabulls Real Estate, Sobha Developers, Macrotech Developers, Prestige Estates and The Phoenix Mills have given a negative return of up to 32 per cent during this period.

Abhinav Sinha, an analyst at Jefferies, too, remains bullish on the road ahead for the sector in the backdrop of likely sector consolidation, better corporate balance-sheets and a likely near-term peak in rising rate cycle.

"The sector valuations (PBx) are near the 10-year average after correcting around 40 per cent from their 2021 peak. The result season should see focus on FY24E pre-sales guidance where we expect double-digit pre-sales growth from Godrej Properties (GPL), Lodha and Prestige Estates; particularly given their recent new project additions. GPL, DLF and Lodha are our preferred picks," he said in a recent note.