The Indian real estate market has experienced a notable upswing, with realty stocks displaying substantial gains. This year, in particular, has seen impressive growth, driven by robust demand, strong earnings, and a significant inflow of foreign capital into the sector. The question on everyone’s mind is whether this rally is sustainable or if there’s a potential bubble in the making. In this article, we will examine the dynamics behind the surge in realty stocks, delve into expert opinions, and analyze the factors that could influence their future performance. So, let’s take a closer look at the world of realty stocks.
Realty stocks have been on an impressive upward trajectory in 2023. The Nifty Realty index has surged by a significant 42% year-to-date, outperforming the Nifty 50, which has gained a modest 9%. Prominent players like Prestige Estate and DLF have witnessed their stocks soar by over 50%, while Macrotech Developers, Mahindra Lifespaces, and Phoenix Mills are not far behind, with gains exceeding 40%.
One of the primary drivers behind this surge is the influx of foreign capital into India’s real estate. A report by Nasdaq-listed investment management company Colliers reveals that India received foreign institutional inflows worth $26.6 billion into real estate during the six-year period from 2017 to 2022, marking a three-fold increase from the preceding six-year period. Notably, these foreign investments accounted for a substantial 81% of the total investments in real estate during 2017-22.
According to Colliers, this surge can be attributed to the country’s investor-friendly FDI policies, increased transparency in deal structures, and higher investment limits through the direct route, all of which have encouraged global investors to invest in India’s real estate sector.
The pivotal question is whether this remarkable rally in realty stocks can persist. According to experts, the answer is a resounding “yes.” Here’s why:
HDFC Securities points out that real estate developers are reporting record presales, even in the seasonally weakest quarter, Q2. Prestige, Sobha, Macrotech, and Phoenix Mills have all reported exceptional growth in presales in the second quarter, with impressive year-on-year and quarter-on-quarter figures.
The momentum is expected to continue into Q3FY24, with new launches adding a multiplier effect to presales. This is particularly evident in the top six cities, such as Bengaluru, Mumbai Metropolitan Region (MMR), and Pune, where strong volume-driven growth is anticipated. In contrast, NCR’s growth is expected to be driven largely by higher price appreciation in the luxury segment.
While real estate is known to be a rate-sensitive sector, HDFC Securities believes that interest rates are no longer the sole determining factor for the sector’s demand. A higher mortgage rate may impact affordable and mid-income housing, but luxury demand remains indifferent. Developers like Prestige, Godrej, and Macrotech are increasingly focusing on premium projects, resulting in higher average price realization.
HDFC Securities predicts substantial growth in aggregate revenue, EBITDA, and PAT for the covered universe, with a YoY growth expectation of 30%, 32%, and 37%, respectively. Moreover, the YoY margin is expected to expand by 137 basis points QoQ in Q2FY24.
HDFC Securities recommends top picks in the realty space, including DLF, Oberoi Realty, Sobha, Mahindra Lifespaces, and Prestige Estates Projects. Oberoi Realty stands out with its dominance in the premium real estate segment and planned launches for the second half of the financial year. Mahindra Lifespaces is expected to outperform thanks to its industrial focus and new land bank additions. DLF, on the other hand, is considered a play on the NCR market and the late-cycle commercial office recovery. In the southern markets, Sobha and Prestige Estate are favored choices.
Nuvama Wealth Management, another brokerage firm, believes that developers with strong rental portfolios like DLF, Brigade Enterprises, and Embassy Office Parks will benefit from the likely revival in office space demand over the medium term. Nuvama has a buy call on DLF and Brigade Enterprises.
The realty stocks rally in India has been impressive, driven by foreign investments, changing dynamics of interest rates, and a surge in presales. While some experts argue that this rally is far from over, investors should tread carefully and consider their options wisely. Top picks include DLF, Oberoi Realty, Sobha, Mahindra Lifespaces, and Prestige Estates Projects. However, as with any investment, it’s crucial to conduct thorough research and seek advice from certified experts before making any decisions.