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Real estate stocks have become the new favourites of investors, as the ‘laggards to leaders’ theme plays out for the sector. In the past one year, the Nifty Realty index has risen around 140%, far outpacing the Nifty 50 index, which has gained 60% during the period. Further, the S&P BSE Realty index surged to a multi-year high last week, and has been an outperformer compared to the Sensex.

A confluence of favourable factors is said to be driving this optimism.

In a run-up to the festive season, key lenders have trimmed home loan rates by around 15-60 basis points to 6.5-6.7%, which is the lowest in a decade. One basis point is one-hundredth of a percentage point. This coincides with the slew of project launches by listed real estate developers across key cities. “While initial expectations were for new launches to commence from the second week of October, strong demand tailwinds have led to developers preponing many launches to September. Based on our channel checks and commentary from developers in our coverage universe, most new launches in September have seen strong customer response," analysts at ICICI Securities Ltd said in a report on 22 September.

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Apart from that, the gradual reopening of the economy and the hiring boom in the Indian information technology (IT) sector are likely to trickle down into increased real estate sales in the months to come, especially in urban areas.

“Historically, stock prices have a high correlation with volume uptick, and the recent rally in real estate stocks is on account of this. Apart from that, listed real estate developers have managed to address concerns of leveraged balance sheets. After the recent spree of debt reduction, the sector’s net-debt to equity is around 0.5 times, much lower than the last seven-year high of 1.2-1.5 times. This offers comfort to investors," said Avneesh Sukhija, an analyst at BNP Paribas Securities (Asia) Ltd.

While the mood is upbeat, some analysts caution investors against getting carried away. “I feel these expectations are inflated and the market is pricing in a best-case scenario for the real estate sector, which has been a laggard of sorts from the past few years. The market is extrapolating latest property registration data, which in a way indicates that the sector may now have entered a structural super-cycle," said Vishal Bhargava, an independent expert.

“Investors need to understand that only launching a project is not enough, it has to be lucrative. The sales volumes that we are seeing are largely because prices have declined in key residential markets. If price hikes were to happen, volumes will take a hit. In simple terms, the key factor i.e. confidence of taking price hikes is missing. I would caution against this excitement in real estate stocks," Bhargava said.

Although the sector was among the worst hit during the pandemic, channel checks show that the increased pace of consolidation has translated into market share gains for large developers as smaller firms struggle to meet their working capital needs. This has kept real estate stocks in good stead even at the time sales were hit last year, analysts said.

“Going ahead, there could be some correction in real estate stocks on account of profit booking; however, the long-term outlook is positive. Apart from that, any liquidity event like IL&FS is a risk and could derail the optimism in real estate stocks," added Sukhija.

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