Positive signals for India's real estate sector as economy normalises

Demand expected to pick up; deleveraging, consolidation are key triggers

The real estate sector has seen speculative interest from traders and investors. Although it was hit hard by the pandemic, there are positive trends. One is that the business is expected to pick up, both in the residential and the commercial segments, as the economy normalises. Second, low interest rates could spur demand.
 
A third trend is that of consolidation. As the smaller under-capitalised players are forced out by the recession, better-capitalised players are grabbing market share.
 
Financial year 2020-21 (FY21) was poor. One indication would be that collections from stamp duty declined by close to 35 per cent in key markets such as Delhi — so much so that the state cut circle rates by 20 per cent for six months, to encourage activity.
 
However, Q1FY22 performance was mixed. While there was year-on-year (YoY) improvement against a very low base, it was compared with Q4FY21 with drops in top and bottom line.
 
Recent news such as a jump in registrations in Mumbai indicate that Q2 results could beat expectations. Anecdotally, industry players in most regions say there has been an improvement.
 
The improvements in debt-equity ratios are likely to be significant, since it eases the situation for an industry that is capital intensive and heavily dependent on credit. Rating agencies have upgraded long-term ratings for DLF, Brigade, Macrotech, etc.

In recent advisories, analysts have upgraded earnings estimates for the second half FY22 and target valuations.
 
DLF, for instance, had a reasonable Q1, beating revenue as well as earnings expectations. It’s slated to see a trend of higher land bank valuation, and a bottoming out of commercial vacancies. DLF generated a cash surplus of Rs 141 crore in Q1 and it reduced net debt. The net debt-equity ratio is now at 0.13x and net debt could decline further. Financing costs have also reduced.
 
Godrej Properties missed expectations on revenues in Q1, but a bright spot was a pickup in pre-sales towards June, a trend that is believed to have continued. It has a pipeline of projects and a good balance sheet with surplus cash of Rs 3,500 crore, which will be deployed to buy land.
 
Oberoi Realty (ORL) had a poor Q1, missing estimates in terms of revenues, pre-sales, etc. But it is moving into non-metro markets, expanding outside Mumbai. It is looking at short-cycle projects and it also has a strong balance sheet.
 
Phoenix Mills is a gamble as it was hit hard because of its focus on the commercial space. It could continue to struggle for a while because of the pandemic. Prestige Estates is also likely to see lower FY22 results, but it has a capex cycle going, which could pay off in the next fiscal. Sobha has also managed to cut net debt.
 
The Nifty Realty Index has beaten the Nifty throughout the past year with returns of 83 per cent, and it has returned 4.4 per cent in the last month. This includes a jump of over 5.5 per cent on Tuesday.