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The good news for investors in shares of the residential real estate sector is that key listed companies are expected to clock robust sales growth in the March quarter of FY22 (Q4FY22). Despite the third covid wave causing some disruption at the start of the quarter, residential property projects have seen increased demand.

Analysts at Jefferies India Pvt. Ltd estimate property sales of five out of six listed property developers under its coverage to hit a record in FY22. “Our analysis of data from Propequity shows that primary residential sales in top-seven cities were around 15-20% higher year-on-year in February," the analysts wrote in a 28 March report. Sales in these cities touched a record this quarter, despite some impact on volumes during January and February because of the impact of Omicron, according to the report.

Robust sales
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Robust sales

The lack of new projects had weighed on sales performance of some listed developers in the December quarter. In the March quarter, Mumbai-focused Godrej Properties Ltd launched several projects. Others such as DLF Ltd and Macrotech Developers Ltd (Lodha) also launched projects during the period.

A key threat
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A key threat

That, along with encouraging property registrations and inventory data, point to a remarkable Q4FY22 for the sector. Inventory levels fell to nine-year lows in sales and absolute terms across regions, Jefferies’ analysis showed.

However, the good news ends there. Towards the fag end of FY22, elevated input costs are playing a party pooper for real estate companies, making it challenging for developers to maintain the sales momentum in FY23 without raising prices further.

Prices of key materials such as steel and aluminium have jumped 30% and 44%, respectively, over the last one year, data by property consultant Colliers showed. With that, the average cost of constructing per square foot of a residential real estate project would increase from 2,060 in March 2021 to 2,300, according to Colliers. This estimate does not include the goods and services tax.

“Channel checks show that prices have been selectively hiked on a project-to-project basis in Q4 and another 7-10% price increase is required to counter cost inflation. Some developers such as DLF and Lodha, who have ready-to-move inventory, would be better placed than those in the construction phase to raise prices," said an analyst with a domestic brokerage house requesting anonymity.

However, if the size of the price increase is more than double digits, volumes could take a hit in the initial quarters of FY23, cautioned the analyst. That said, listed developers can be expected to raise prices gradually instead of raising them by a lot in one go.

Segment-wise, passing on the burden of elevated construction costs would be most difficult in the affordable housing projects. Here, margins are lower at 15% and bargaining power is limited, analysts said, while the premium and luxury housing segments enjoy margins of more than 30% and thus the scope of price revision is better.

Another important tailwind of lower interest rates on home loans would also start waning as monetary policy normalization picks pace. Stamp duty benefits on the purchase of property from the primary market in the cities of Mumbai and Pune may be removed going into FY23.

These have weighed on the Nifty Realty index, which is down 6% so far in CY222, but all is not lost. The sectoral index has been a star performer in CY21, gaining 54%, significantly beating the benchmark index Nifty50’s 24% rise.

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