Real estate stocks have been buzzing on Dalal Street due to lower home loan interest rates coupled with the upcoming festival season which is expected to boost the demand for properties. Already, at least six components of the BSE Real Estate index have more than doubled investors wealth since the lows of March 2020.
With a rally of nearly 300%, Sobha emerged as the top gainer in the list. The scrip has gained to Rs 569.65 on August 23, 2021 from Rs 143.10 on March 24 last year. Mahindra Life Space Developers, Indiabulls Real Estate, Brigade Enterprises, Godrej Properties and DLF have also gained between 150%-280% during the same period. On the other hand, the BSE Real Estate index has advanced 123% to 2,955. Other stocks including Prestige Estates Projects, Sunteck Realty, Oberoi Realty and The Phoenix Mills have also advanced 93%, 90%, 61% and 48%, respectively.
Positive commentaries by industry leaders further supported the real estate stocks during the past 17 months. For instance, DLF in its annual report highlighted that the residential business has shown strong resilience since October 2020. It further added that there has been an upswing in demand across all segments from affordable and mid income to the luxury and super luxury end of the market. DLF has also lined up lined up a strong pipeline of new product offerings across the next few quarters.
Factors that supported
The pandemic has emerged as a global challenge for various industries, with disruption across the world. Covid-19 caused slow down and impacted the Indian real estate sector also. However, the central and state governments have taken various initiatives including stamp duty waivers, reduced charges and establishment of Special Window for Affordable and Mid Income Housing (‘SWAMIH’), to provide last mile funding for stalled projects.
Keeping the policy rates low also supported the sector to withstand these difficult times. India had one of the strictest lockdowns to prevent the spread of Covid-19. This led to the curtailment of economic activity. Once lockdown restrictions were eased, the economy started witnessing gradual recovery. With the success of the vaccination drive, it is expected that the current fiscal should show revival aided by initiatives of the Central Bank and governments.
On a year-to-date basis, select real estate players have delivered more than 20% return to investors. For instance, Mahindra Lifespace Develpers have gained 103% in 2021 so far. Indiabulls Real Estate, Sobha, DLF, Brigade Enterprises and Prestige Estates Projects have gained between 20%-65% YTD. On the other hand, the benchmark BSE Realty index has gained 19.28% during the same period. Other players including Oberoi Realty, The Phoenix Mils and Godrej Properties have gained 14%, 4% and 3% YTD. However, Sunteck Realty have declined marginally 0.78% on a year-to-date basis till August 23.
Latest report card
The year gone by stood in favour of real estate sector in terms of bottom line. Realty majors which are part of the BSE Real Estate have cumulatively posted more than 100% growth in net profit in FY21. Their cumulative net profit jumped to Rs 3,143 crore for the financial year ended March 31 against Rs 1,528 crore in the same period last year. Robust financial results by DLF majorly supported the overall bottomline of real estate sector. Net sales declined by 27% YoY to nearly Rs 23,000 crore. Company wise, DLF posted a net profit of Rs 5,415 crore in FY21 against a loss of Rs 583 crore last year. Prestige Estates Projects and Oberoi Realty reported 261% and 7% YoY growth in net profit at Rs 739 crore and Rs 1456 crore, respectively, during the last financial year. On the other hand, Sobha, Sunteck Realty and The Phoenix Mills posted 78% YoY, 43% YoY and 84% YoY dip in net profit in FY21.
Trends in real estate sector
Market watches believes that consolidation in the residential market has been rising. As a result, market share of listed real estate players has increased to 35% from 17% a decade ago. This makes the case to zero in on the listed or organised players which have strong balance sheet. Overall, 2019 levels in terms of demand for residential real estate is expected to be regained in the next two years.
We believe that the top 10 listed players continue to gain market share in top cities in India, unorganised players finding it difficult to launch new projects due to weak launch pipeline and unavailability of capital. Listed players like Godrej Properties, Oberoi Realty, Sobha and brigade have a good pipeline of projects to be launch in next two years.
On customer front, customers are looking to buy ready to move property or nearby completion property and along with this customer preferred to buy branded players property. As per the market reports Mumbai has seen the highest property registration in the month of July 2021 of last 10 years, up 15% month-on-month (MoM) and up 239% year-on-year (YoY). We expect the momentum in residential real estate to continue this year.
In the organised residential real estate space, we have a ‘Buy’ call on Godrej Properties with a target price of Rs 1,800. The company is amongst India’s largest developer by residential sales. As of 31st March 2021, the company has a total salable area of 187 msf in total 85 different projects across India. The company has done a pre sales of 4.17 msf in Q4FY21 up by 16% and booking values of Rs 2,632 crore, up by 10%. Godrej Properties has received a very good response for the new launched property.
As Godrej Property having a very robust pipeline of 12.3 msf for upcoming years, further new launches in Mumbai post easing of lockdown will further aid the company. We are expecting a strong recovery in residential market in second half 2022, company to get benefit of shift from unorganised to organised market as well as company have a great brand recognition.
Investors should keep an eye on Covid cases in the country. Any third wave amid the ongoing recovery could gain dampen sentiment for the sector. However, it is expected that if the the cases continue to decline and the Coronavirus is kept at bay, real estate markets should witness an upward trend in the coming future.