Sizzling rally in Indian property stocks seen extending over cuts on rates

By Satviki Sanjay

India’s property stocks are set to extend their already sizable gains on growing expectations that the central bank may start cutting interest rates next year.
 

The NSE Nifty Realty Index has gained 36% since a March-low as cooling inflation allowed the Reserve Bank of India to keep rates on hold. In comparison, a global gauge of real estate stocks rose only 3.6% in the same period. 

The outperformance is a sign of sustained appetite for properties in the world’s most populous nation amid a respite in the increase of borrowing costs. Improving earnings for large companies should also help further the rally. 

“Domestic economic conditions have boosted real estate demand and resultant stock prices,” said Samar Sarda, executive director at Axis Capital Ltd.

The boom in India is in a sharp contrast to China, where the property sector continues to be in a dire state even after the government ramped up support to facilitate funding and boost demand. A Bloomberg Intelligence gauge of Chinese developers’ stocks is down 21% this year.

While valuations for real estate stocks in India have risen significantly since late-May to a price-earnings ratio of about 39 times, they are still below a peak of about 52 times in 2021.

Property companies are also seeing income recovery with Godrej Properties Ltd. and DLF Ltd. reporting more than a 40% year-on-year increase in fourth-quarter earnings. Analysts are expecting net income for both firms to jump more than 30% for the current fiscal year. 

Favorable government policies, particularly in the affordable housing segment, as well as rising income levels will also provide support for developers, brokerage Sharekhan said in a report. 

“Real estate is a historically under-owned sector,” said Rohit Chawda, acting chief executive officer of Taurus Asset Management Co. Ltd. “We are going to hold our investments for the next three to four years.” 

To be sure, lower-than-expected monsoon rains could mean a longer wait for the RBI to cut rates. If rains are below normal, there may be higher retail food inflation, which could prompt the central bank to resume rate hikes