 "Despite rally, stay away from realty sector")
Real estate stocks seem to have caught investors’ fancy recently. The Nifty Realty index has gained almost 38 per cent in the past three months. In contrast, Nifty 50 Index has risen only 14 per cent. And, it’s not a few stocks that are driving the realty index to these levels. The majority of the stocks have seen 27 per cent growth. Indiabulls Real Estate has soared 110.3 per cent, Housing Development and Infrastructure is up 64.4 per cent, Delta Corp 56.5 per cent, DLF 47.1 per cent, and Sobha and Oberoi Realty are up 27 per cent.
For a long time, investors have stayed away from real estate stocks due to the concerns about the sector. While the fundamentals have not changed much, investors are bottom-fishing on the hope that the economic conditions will start improving from here and falling interest rates would bring in demand for houses, according to analysts. But, they also suggest it’s not time for retail investors to look at the sector, as the problems of high debt, slow sales and piling inventory are still prevalent.
“The recent results have shown no signs of improvement in the sector,” says G Chokkalingam, founder, Equinomics Research & Advisory. He points out that the inventory of real estate companies is much higher than sales - in some cases, more than 10 times. This means if a company reports sales of, say, Rs 100 crore, the inventory to be sold is worth Rs 1,000 crore. Chokkalingam thinks the recent gains are more due to sentiments than fundamentals.
“For the sector to see any meaningful change in sales and inventory levels, it will take at least 12-18 months,” says Monu Ratra, CEO of India Infoline Housing Finance. Talking about the inventory levels, Ratra says markets such as Delhi national capital region have five-six years’ inventory and Pune has 14-16 months. “The falling interest rates have not yet brought in demand as they have not impacted the affordability. For buyers, the prices are still on the higher side,” says Ratra.
The recent surge in the realty index has also happened because of increasing risk appetite on expectations of better economic growth, according to Janish Shah, head-equity investments, Quantum Advisors. But, he warns that if there’s any liquidity issue in the future, say, due to the US Fed raising interest rates, these stocks could get affected severely. “If you look at the January-February period, the index fell sharply when the markets corrected due to concerns about the Chinese economy.”
Before investing in real estate stocks, investors should first look at the leverage a company has on its balance sheet. “Start with the debt-to-revenue ratio and then look at debt-to-equity. Many companies have debt as high as the revenues they have reported,” says Chokkalingam. Then look at the inventory. For this, check the inventory as a percentage of sales. Experts say it should ideally be twice the sales. Also, check the growth in sales year-on-year and quarter-on-quarter.
It’s better to opt for a developer that sticks to its core markets, says Shah. During the boom time, many developers expand into different markets. It’s difficult for a realtor to establish itself in new markets, as property market differs from state to state. “Projects of such developers are stuck due to the sluggish demand in Tier-II and Tier-III cities. Such developers will be the first one to falter,” Shah says.
Real estate demand picks up when the economy does well. Keep a watch on macroeconomic indicators such as GDP growth, corporate earnings and credit offtake.
