Realty's FY25 pre-sales goal hinges on H2 delivery

All-India residential sales dropped to 231 million square feet (msf), down 7% both year-on-year and sequentially in Q2FY25, said a Kotak Institutional Equities report on 27 November. This was a fallout of weakness in launches, which stood at 221 msf, down 10% year-on-year and 9% sequentially. Moreover, these launches also included around 37 msf of affordable and mid-income launches by the Delhi Development Authority in September. Adjusted for it, launches were even weaker at around 195 msf, down 22% year-on-year and quarter-on-quarter, said the Kotak report.

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In this backdrop, timely and faster unveiling of new projects is a desperate need in H2FY25. Given the low inventory levels, companies could raise prices for available housing units, aiding realization gains. Plus, the lull in affordable housing demand prompted real estate developers to focus on the luxury and premium segment, aiding the sector’s pricing trajectory. But at the same time, low inventory has made new launches a differentiating factor for listed real estate stocks since it is crucial for volumes.

It looks like the sector has had a decent headstart. Activity in the residential property sector rose to six-month high in October, in line with the festive season, showed an analysis of Propequity data by Jefferies India. “Sales/launches by area are higher by 30%/25% versus the past three-month moving-average in October. Sales for the top 7 cities were flattish year-on-year in October by volumes (area sold), but 20%+ on value basis, driven by pricing," said Jefferies in its 25 November report.

The launch momentum in H2FY25 is expected to be robust now that state elections are out of the way in Haryana and Maharashtra where key residential markets of Gurugram, Mumbai Metropolitan Region and Pune are located. Further, it would be crucial to monitor the easing of approval-related challenges that developers are facing, especially in Bengaluru. This has severely impacted the performance of south-focused realty firms such as Prestige Estates Projects Ltd, Brigade Enterprises Ltd and Sobha Ltd. These companies would have to do relatively more catch-up on pre-sales momentum than competitors like Godrej Properties Ltd and Macrotech Developers Ltd (Lodha), who have fared relatively better.

Meanwhile, a comforting factor is that listed realty companies have a lot of legroom for business expansion and new land deals, thanks to the robust cash flows. “Developers utilized around 34% of the collections (and virtually the entire operating cash flows) towards land-related capex in H1FY25 compared with 32% in FY24 and 29% in FY23," said a Numava Research report on 27 November. Plus, some developers also raised equity funds through qualified institutional placement and rights issue.

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These factors have helped in reducing debt burden for several listed developers in the recent quarters with some now being net cash positive in the residential business. Strong balance sheets would allow the companies to invest in new land parcels for fuelling growth. In fact, the spree of debt cuts is also seen as a factor that has contained a severe correction in real estate stocks despite muted pre-sales. From its all-time high of 1,150 on 18 June, the Nifty Realty index is down 11%.

Meanwhile, after last week's disappointing Q2FY25 gross domestic product data, the clamour for interest rate cuts is getting louder. Any potential interest rate cut, which directly impacts home loan rates, by the Reserve Bank of India could be a sentiment boost for realty stocks.