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The real estate sector, a key casualty of the pandemic, has made an impressive comeback. Improving investor sentiment towards property stocks is well captured in the massive surge of the Nifty Realty Index. In the past year, this index has risen by about 75% and is the second-best performing sector index, significantly beating the benchmark index Nifty50. In fact, on Friday, the S&P BSE Realty index breached the 4,000 level as well.

The excitement is understandable. Sales have been robust this year aided by a mix of factors such as historically low home loan rates and temporary stamp duty cuts in some markets. Plus, in a bid to push ready-to-move inventory, many realtors gave discounts coupled with easy payment options.

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Back with a bang

An analysis by real estate consultant Anarock Property Consultants showed that the top nine listed players saw cumulative revenue bookings of nearly 14,883 crore in the first half of FY22 compared with 9,483 crore in the same period last fiscal. These companies sold 18.46 million sq. ft (msf) of residential area in H1FY22 against 13.28 msf in the year-ago period. Total residential area sold in H1FY22 surpassed the corresponding pre-covid period when nearly 17.2 msf was sold, Anarock’s research showed.

So far, so good. However, risks have emerged in the last few months. Steep rise in raw material and labour costs is said to have prompted residential property developers to raise prices. Deepak Goradia, president at industry body Credai-MCHI said residential real estate prices in markets such as the Mumbai Metropolitan Region have already risen by 10-15%. “After a plateau for more than a couple of years, and due to steep rise in construction raw material prices, property price rise was inevitable not only in key cities but also in tier-II and tier-III cities. We expect other urban areas to follow the same in the next few weeks if rising costs aren’t arrested," he said.

And this, industry experts and analysts say, could weigh on sales, potentially halting the dream run of real estate stocks. “Price hikes have started to happen in a gradual manner in some key residential property markets. Though input cost inflation is hitting developers hard, they should avoid taking disproportionate price hikes simply because it would impact sales, which have started to meaningfully improve only in recent quarters," an analyst with a domestic brokerage said requesting anonymity. He added that while it is too early to quantify the impact of price hikes on sales volumes, it is a sentiment negative for real estate stocks and poses a downside risk to volume growth. Much depends on how demand pans out.

Secondly, investors should note that apart from price hikes, expectations of interest rates rising sooner than later could also be a dampener for real estate sales.

On the bright side, listed realty firms have benefited from the accelerated pace of consolidation in a post-covid world. However, the rally in realty stocks largely factors in this benefit, analysts said. As such, going ahead, the trajectory of unsold inventory and new launch pipeline would be among the key catalysts for this sector.

Latest data on residential sales compiled by Edelweiss Securities Ltd showed that new launches continued to decline in October, falling 24% sequentially and 47% from the year earlier in the top seven cities. This has aided faster absorption of ready-to-move inventory. Unsold inventory fell 11% in October from the year earlier, with Kolkata witnessing the highest correction, followed by Bengaluru, MMR and Pune, showed Edelweiss data.

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