Investor expectations from real estate stocks have climbed many levels, though it’s unclear if these are built on a solid foundation.

The BSE Realty index has rallied 60% in a year, a stellar performance compared to the Sensex and BSE 500 index, which rose by 14% and 17%, respectively. Perhaps, the improving financials of top-rung real estate firms have made investors optimistic about a recovery.

Clouds of gloom on some fronts such as a pile-up of unsold units and mounting debt are clearing up, but a recovery in home sales and prices, key to better profits, is still some quarters away.

Large listed companies are seeing green shoots of recovery. An analysis of 10 real estate firms that comprise the BSE Realty index shows that the average interest cost as a percentage of sales of these firms improved to 18% in the December quarter, from 25% in the preceding quarter and 22% in the year-ago period—going back to the level seen eight quarters earlier.

Two critical factors have played out favourably for realty firms. One, the stringent enforcement of the Real Estate (Regulation and Development) Act (RERA), which pulverized new launches, and forced companies to push sales from existing projects. This pruned unsold inventory levels. Data from Icra Ltd’s sample of 11 listed realty firms, mainly catering to the housing segment, showed a 2.8% decline in inventory levels (in value terms) for the first time in two years, between the six months ended March 2017 and the six months ended September 2017. Lower inventories and fewer project launches brought down working capital needs and interest costs too.

Two, repayment by debt-laden firms has trimmed overall debt of listed companies in the index. The numbers are likely to improve further by the end of the March quarter.

Home sales rose both in value and area terms during the December quarter for BSE Realty index firms.

Reinforcing this data, Icra’s quarter-to-sell ratio that indicates the number of quarters required to sell existing inventory, fell to 12 in the December quarter from 15 in the March quarter.

However, investors must note that the road to recovery has more obstacles. These gains in the profit and loss account have accrued from regulatory changes, operating efficiencies and a balance- sheet clean-up that has lowered interest costs.

Improving the payment collection cycle from customers (which has been declining for many quarters) is the new challenge as projects need to be RERA-registered before soliciting homebuyers and taking any advance payments.

While new launches will signal confidence among developers that demand for homes is improving, so far, realty firms are trying to push existing inventory. Demand is subdued and the Reserve Bank of India’s House Price Index shows declining affordability.

Anarock Property Consultants Pvt. Ltd says that the forthcoming Gudi Padwa festival may be subdued for home sales as buyers are cautious.

Besides, with large developers moving into the affordable housing segment, where demand is higher, future realizations and profit margins may be lower.

Meanwhile, a 60% run-up in index stocks leaves little room for further appreciation, unless there is a strong demand pull that increases home sales and prices. Chasing the sector for more returns at this point does not seem to be justified.