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Business News/ Markets / Mark To Market/  Booming real estate’s in for a breather

Booming real estate’s in for a breather

  • The base is high now. Also, property prices have risen as realtors pass on higher input costs. While this has led to improved realizations, further price hikes could derail demand momentum

A strong launch pipeline of large listed developers suggests that most companies may well be able to meet and/or even exceed their FY24 pre-sales targets. (Image: Pixabay)

The Nifty Realty index has zoomed over 100% in the past one year. The spike is in tandem with pre-sales or booking trends indicating housing units are selling like hotcakes. The upmove continues to be driven by traction in luxury and premium segments, thus easing unsold inventory levels.

The Nifty Realty index has zoomed over 100% in the past one year. The spike is in tandem with pre-sales or booking trends indicating housing units are selling like hotcakes. The upmove continues to be driven by traction in luxury and premium segments, thus easing unsold inventory levels.

All-India residential sales in the December quarter (Q3FY24) recorded a fresh high with pre-sales of 301 million square feet (msf), crossing the peak of 259 msf hit in Q2FY24, showed Kotak Institutional Equities analysis.

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All-India residential sales in the December quarter (Q3FY24) recorded a fresh high with pre-sales of 301 million square feet (msf), crossing the peak of 259 msf hit in Q2FY24, showed Kotak Institutional Equities analysis.

A strong launch pipeline of large listed developers suggests that most companies may well be able to meet and/or even exceed their FY24 pre-sales targets. The increased pace of consolidation, especially during post covid-19 pandemic, has worked in the favour of listed developers. The sector has shown resilience to elevated home loan rates. However, upscaling from here on could be challenging for developers.

The base is high now. Also, property prices have risen as realtors pass on higher input costs. While this has led to improved realizations, further price hikes could derail demand momentum. “Housing prices have gone up sharply (15-35%) in 2023, especially in key markets like the National Capital Region (NCR), Hyderabad and Mumbai markets," said a CLSA report.

Luxury property prices have appreciated even more. “This has also led to increase in speculative demand, especially in the NCR market (25-40% of buyers are speculators/ investors as per our channel checks). Such sharp price increases may deter end-users, leading to high unsold inventory (as speculative buyers try to offload their units)," said the CLSA report.

DLF Ltd stock, which has the highest weightage in the Nifty Realty index, has jumped 122% in the past one year. The company has vast exposure to NCR and has benefitted from sustained luxury housing demand. Its new launch pipeline is focused on this category.

Recall that in the past, in a spillover effect, real estate sales in the IT/ITes hubs of Bengaluru and Pune got a boost with the IT sector doing well. Lately, though, hiring trends have been subdued, which may hamper residential demand if purchasing power of potential customers takes a hit.

Many listed developers are expanding their footprint in newer geographies to reduce the concentration risk. But in highly competitive markets such as Mumbai Metropolitan Region, incumbents may have a better hold on pricing and brand value than new entrants. Prestige Estates Projects Ltd and Sobha Ltd are among examples of companies that are diversifying their presence. Both the stocks saw impressive gains of over 130% each in the last year.

Having said that, the Street could now be expecting pre-sales trajectory to remain stellar amid skyrocketing valuations. Many realty stocks are trading at a 20% premium to net asset value - a scenario that was last seen in the previous upcycle, which was around 2007, said Nuvama Research report.

This has led to concerns among investors regarding valuations and future stock performance. Unlike the earlier cycle, this time there is an increased focus on cash flow generation, which is comforting. For instance, in the previous upcycle Macrotech Developers Ltd (Lodha) witnessed a significant build-up in leverage due to high working capital requirements, but the company has significantly improved its working capital management over the past decade, according to Nuvama’s analysis.

Robust cash flows have helped many companies pare debt in recent quarters, but borrowing costs remain elevated. Going ahead, interest rate cuts by the Reserve Bank of India remain a key trigger for the sector. Lower rates bode well for the ailing and interest-rate-sensitive affordable housing segment, although a meaningful recovery could come with a lag.

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