Markets
Churn rate to decide how FY24 pans out for realty firms
Summary
- Barring the affordable housing segment, the mid and premium residential markets have shown resilience in the face of rising interest rates
The spectre of rising interest rates is largely out of the real estate sector’s way. The Reserve Bank of India (RBI) has held its repo rate steady at 6.50% for the second time in a row. Market predictions widely expect the RBI to maintain this pause for some time, offering a degree of relief to investors in rate-sensitive real estate equities.
Barring the affordable housing segment, the mid and premium residential markets have shown resilience in the face of rising interest rates. Consequently, listed realty companies ended FY23 with bumper pre-sales. With demand momentum expected to sustain, companies are looking at a spree of new launches in FY24.
“Q4FY23 turned out to be the best quarter for most of the top-12 listed companies as they delivered 44% year-on-year (y-o-y) growth in pre-sales. In FY23, our coverage companies posted 43% y-o-y growth in pre-sales. Excluding DLF, which doubled its pre-sales in FY23, cumulative growth for other coverage stocks was still healthy at 32%," said analysts at Motilal Oswal Financial Services Ltd. Further, companies under its coverage are planning to launch around 100 million square feet (msf) of projects in FY24 versus 66msf in FY23.
However, the ability of these companies to boost pre-sales will hinge on a key metric - the churn rate.
“Growth was driven by an improved churn rate (bookings divided by inventory + launches), which increased to 48% in FY23 from 43% in FY22 despite a ~200bp increase in the interest rate during the year. If companies could sustain the churn rate, they would deliver 32% growth and surpass the FY24 pre-sales guidance by 15%," added the Motilal Oswal report.
Another theme that continues to play in favour of listed real estate companies and could aid sales growth is consolidation. Analysts at Antique Stock Broking Ltd point out that in terms of consolidation, Gurugram and Noida are the best placed with the top five companies having market share of 58% and 57% respectively in CY22, 80% and 65% in January-April 2023 respectively.
“DLF alone has a share of 20% in CY22 and 36% in Jan-Apr’23 of the total sales booking in Gurugram, giving it a significant competitive advantage over other players in terms of pricing power," said the Antique report dated 9 June. Further, the share of the top companies in the key market of Bengaluru continues to remain steady with Prestige Estates Projects Ltd, Brigade Enterprises Ltd, Sobha Ltd, and Godrej Properties Ltd accounting for 22%–24% of the total share.
In this calendar year so far, the Nifty Realty Index has rallied 15%, and any further upside would depend on sustenance of pre-sales momentum.
