Is the affordable housing euphoria overdone?
The BSE Realty index has been moving up sharply in the last few months. One reason, of course, is that realty stocks had been really battered earlier and the market is clutching at the hope that the government’s affordable housing initiative will help the sector pick itself up.
Realty consultant and adviser Knight Frank India Pvt. Ltd, in a research report, has highlighted a visible surge in affordable housing projects. Across eight large cities, homes priced below Rs50 lakh comprised about 71% of the total launches between January and June 2017, significantly up from 52% in the corresponding period in 2016. But the moot question is: does this merit such a big leap in the realty share prices?
Over a year, front-rung stocks like Oberoi Realty Ltd, Sobha Ltd and Godrej Properties Ltd have run up. Although there has been an increase in residential unit sales in the last two quarters in some regions, one must note that there is considerable unsold inventory in the system. This would weigh on realty prices and on realizations. Further, these companies may consider tapping the affordable housing market opportunity to ramp up revenue, but they are not in the fray yet.
Meanwhile, what’s more glaring is the rally in the shares of small developers like Peninsula Land Ltd, Poddar Housing and Development Ltd, Arihant Superstructures Ltd and Ashiana Housing Ltd. Investors would do well to tread cautiously, as so far most of these firms have shown erratic revenue growth. Some like Ashiana Housing and Poddar Housing even posted a revenue contraction in the March quarter and they have to align their operations with the stringent Real Estate (Regulation and Development) Act (RERA), 2016, enforced from 1 May 2017.
Moreover, the affordable housing market is fragmented with scores of developers. Those with weak financials may even wind up operations as the cost of compliance with the new regulations may be high. For example, according to Shubhranshu Pani, managing director (strategic consulting) at property consultancy Jones Lang LaSalle (JLL) India, only 315 of the 15,000 projects in Maharashtra have registered under RERA. “I expect a huge rush of projects being registered closer to July end,” he said.
Some states have not yet announced the guidelines, which in turn could slow the pace of launches in the near term. This is not all. Tax increases and greater clarity on input tax credit post-goods and services tax would dampen sales for some time to come.
Further, JLL India in it monthly real estate report also says that with job losses looming over the information technology/IT enabled services and financial services industries, demand for residential realty across hubs of Bengaluru, Hyderbad, Pune, Navi Mumbai and Noida may be affected. In other words, a marginal growth in sales reported by a handful of promoters should not be mistaken for a comeback in earnings growth of realty firms.