BackNifty Realty index up 49% this year; does the realty sector have more steam left?
The Nifty Realty index is up 49% this year, outperforming the Nifty 50. Realty stocks have gained due to high sales momentum and the strong economic recovery. Experts predict that the momentum will continue for the next few years.
PremiumReal estate company stocks have been doing really well this year. The Nifty Realty index is up 49 per cent this year so far, significantly outperforming the equity benchmark Nifty 50 which has gained just 7 per cent in the same period.
Realty stocks have gained in the recent past due to high sales momentum amid a resurgence in end-user-driven pre-sales growth.
Some of the components of the Realty index, such as Prestige Estates Projects, Macrotech Developers (Lodha) and DLF, have surged between 58-70 per cent on strong sales momentum despite elevated interest rates.
Why are realty stocks rising?
Along with the pent-up demand, realty stocks are riding the strong economic recovery of the country. Experts believe the momentum will continue for the next few years.
Vijay Agarwal, Director - Investment Banking at Equirus said the increase in realty stocks can be attributed to other variables such as stability in interest rates, and stability in home prices which move in tandem with commodity prices, which have cooled off in the last two quarters.
What also worked to the benefit of the sector is the consolidation of the market from unorganised to organised, which is playing out in favour of top developers, gaining them a larger chunk of the pie. This change is not a short-term fad but a long-term phenomenon making it an attractive bet for investors, Agarwal said.
Along similar lines, Trivesh D, COO at Tradejini believes the unwavering stance of the Reserve Bank of India in maintaining unchanged repo rates laid a solid foundation for the real estate sector, instilling investor confidence and providing a stable environment.
Complementing this stability was the synergy between the festive season and a substantial recovery in demand, which led to a resurgence in interest and investment in the real estate market. This renewed enthusiasm was further propelled by encouraging second-quarter business updates from companies within the sector, highlighting the industry's adaptability and resilience, Trivesh underscored.
A significant contributor to the Nifty Realty index's success was the substantial increase in foreign investor inflows, solidifying the sector's attractiveness and driving the index to new heights, Trivesh underscored, adding that after the pandemic, the luxury property segment experienced a noteworthy rebound, marked by record-breaking sales figures reported by companies like Prestige Estate Projects and Sobha.
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More steam left?
"The real estate sector has given a healthy return in the last few months due to the expectations that sales momentum will continue to be healthy despite the slowing down of pent-up demand," said Kripashankar Maurya, AVP of Research at Choice Broking.
"We were in an interest rate upcycle for the last 12-18 months despite that the real estate industry has shown healthy growth in terms of launches," Maurya observed.
Maurya pointed out that the Indian residential real estate market had its most successful year in almost ten years, exceeding the highest level of housing sales achieved in 2014. In 2022, the top seven cities saw nearly 3.65 lakh units sold, versus nearly 3.43 lakh units sold in 2014. Additionally, there were around 3.58 lakh new property launches in CY2022, representing a 51 per cent growth.
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Maurya expects the upcycle in real estate will continue for the next two to three years, especially in the luxury and mid-income housing category, given the increasing per capita income, aspirations to have home ownership and the capability to absorb increasing commodity prices.
Maurya has Mahindra Lifespace Developers and Sobha as the top picks in the real estate sector.
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Agarwal of Equirus expects the growth in the overall sector to continue to grow at about 12-15 per cent in the next two to three years.
"The upcycle in the real estate sector usually lasts up to eight to nine years, and everything considered, I believe we are still in the first half of this cycle and more is yet to come," said Agarwal.
Gaurang Shah, Senior Vice President at Geojit Financial Services expects the earnings of the realty companies to improve going forward as the demand and interest rates have been stable.
Shah sees a large possibility of the interest rate cut next year depending upon the recovery of the domestic data points. While this will be a big positive for the sector, Shah said large projects getting executed and the number of registration run rates also being on the higher side can last for some time going forward from here on.
Shah is positive about Godrej Properties in the real estate sector.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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