Analysts turn cautious about real estate sector

After rallying nearly 37 per cent in the last financial year (FY18) compared with a 10 per cent rise in the benchmark Nifty50, the Nifty Realty index has outperformed the broader markets so far in FY19 with a gain of 5.8 per cent. In comparison, the Nifty50 has moved up around 4.1 per cent during this period.

According to analysts, the robust performance in FY18 was on account of the implementation of the Real Estate (Regulation and Development) Act (RERA) and the government's focus on affordable housing amid strengthening economy and steady interest rates. The sharp run-up has now turned analysts cautious on this space even as they foresee a gradual pick up in demand for housing units.

According to estimates, the demand in 2017 (CY17) had dipped 40 per cent to around 200,000 units from the peak levels seen in CY10-12.

“Our view is demand has bottomed out at these levels as is expected to see better trajectory largely due to improved affordability led by decadal low mortgage rates; government incentives/subsidies and focus on compact/affordable homes. However, a full-fledged demand recovery remains unlikely given weak job trends and lack of investor demand. We expect the real estate cycle to enter into a consolidation phase and recovery will be gradual at best,” said Girish Choudhary and Gaurav Nagori of Spark Capital in a report.

While inventory levels have receded slightly from the peak levels, they are still high based on the last two years absorption levels at around four years, analysts said. With industry focus on launching more enduser centric projects and with the RERA making it tighter to launch projects, they expect the new supply to be at manageable levels.

Given the sharp rally in FY18, analysts now remain cautious on the sector. They prefer developers with strong execution capability, good track record, exposure to steady markets, strong pipeline of launches and focus on affordable projects.

“Investors should wait for the March 2018 quarter (Q4 FY18) results before investing in real estate stocks. Among the lot, I like Oberoi Realty and DLF. One can buy at lower levels. Quality of management, inventory-to-sales ratio and a clean balance sheet should be looked at before investing,” said G Chokkalingam, founder and managing director of Equinomics Research.

Among individual stocks, Unitech, Sobha, HDIL, DLF and Indiabulls Real Estate have gained 7-13 per cent so far in FY19, ACE Equity data shows. In comparison, the Nifty Realty and the Nifty50 indices have moved up around 5.8 per cent and 4.1 per cent respectively during this period.

As regards financial performance, analysts at Kotak Institutional Equities predict a weak quarter (Q4FY18) for sales across metros, where several projects/developers took price cuts and offered discounts at their ongoing (and even completed) projects with unsold inventory.

“Low credit availability has resulted in small developers holding back launches (also due to weak demand) or partnering select developers. We expect debt to increase for Prestige (on account of acquisitions, consolidation and PE payoffs), DLF (negative operating cash flow plus new land acquisition), Oberoi (negative operating cash flow in Three Sixty West) and Brigade (expect negative operating cash flow to continue). Sobha continues to outperform others on operations,” said Sanjeev Prasad, executive director and co-head, Kotak Institutional Equities.