BSE Realty index at over 2-year high, but fundamentals weak

Real estate stocks that were hammered due to demonetisation have since rebounded, outpacing benchmark indices in 2017 even as the sector itself continues to struggle with a slowdown.

In the year so far, the BSE Realty index has gained 51.99% touching over a two-year high in April, against 10.29% and 11.41% gains in the Sensex and the Nifty, respectively. In the same period, the BSE Midcap index rose 20.40%.

In the BSE Realty index top three gainers Indiabulls Real Estate Ltd, DLF Ltd and Sobha Ltd rose 100.28%, 64.08%, 61.54%, respectively in 2017.

“Expectations of a slew of reforms and government measures are driving real estate stocks. These stocks were battered due to demonetisation and are now are seeing a rebound,” said Dilip Bhat, joint MD of Prabhudas Lilladher.

The BSE Realty Index had lost from November 8, when the government withdrew high-value bank notes, till the end of December 2016. Price-to-earning (PE) ratio has also comfortably improved post demonetisation. One-year forward PE ratio in 2017 is at 18.12, against 13.11 during November-december 2016.

Analysts said Real Estate Investment Trusts (REITS) and the establishment of a muchneeded real estate regulator for the first time are building positive sentiment around the sector. According to Bhat.

However, the real challenge for realty stocks will be to deliver earnings growth to justify the rally. In the December quarter of 2016-17, most developers had reported a 20-40% decline in new sales due to liquidity issues and expectations of price cuts.

Brokerage firm Edelweiss Securities Ltd expects an uptick in residential new sales in quarters ahead across key markets, driven by pent-up demand post demonetisation converting into sales lower mortgage rates and