At first glance, it appears that the real estate space will end the year with solid underperformance. The Nifty Realty index is down 8 percent this year so far (till November 25 close) against a nearly 7 percent gain in benchmark Nifty.
In times of rate hikes and soaring inflation, the outlook for the sector is not so bright even though the listed and big players may be well-positioned to endure the pain as some of them have hiked prices.
As brokerage firm Motilal Oswal Financial Services pointed out, despite seasonality, the top 12 listed companies witnessed an 8 percent quarter-on-quarter (QoQ) and a 29 percent year-on-year (YoY) growth in pre-sales in the September quarter of this fiscal (Q2FY23).
However, Motilal Oswal pointed out that these companies cumulatively reported just 3 percent YoY growth in volume terms.
Bet on big
Analysts and brokerage firms are positive about the demand scenario for the sector for the medium term due to improving sales and rising real estate prices.
However, they say the rate hike risks cannot be ignored.
Even the management of realty firms sounded cautious in their earnings calls on their guidance, underscoring the risk of a further increase in interest rates.
Anita Gandhi, Whole Time Director and Head, Institutional Business at Arihant Capital, said the real estate sector has been performing well but this rate-sensitive sector's road ahead has obstacles in the short term.
"Real estate is a rate-sensitive sector and the recent rate hikes are not very favourable to its prospects. Moreover, real estate markets will also start to feel the pinch of IT layoffs so the medium-term outlook for this sector does not look very promising as of now," said Gandhi.
Brokerage firm HDFC Securities also believes that the rate hikes may dent demand.
The brokerage firm pointed out that while there has not been any material impact of higher interest rates on house purchase decisions so far, an additional 50-100 bps rise, if it happens, will dent demand.
In such a scenario, big and listed players look well-placed to endure headwinds.
Motilal Oswal Financial Sector is of the view that a rising interest rate scenario is likely to have a sentimental impact on the sector in the near term; however, amid a rising interest rate scenario with high construction costs and cost of capital as well as constrained industry growth, larger developers will further consolidate their market share.
Motilal Oswal prefers players with an ability to generate robust cash flow over the next three-to-four years and invest in developing their pipeline, which will provide further growth visibility and lead to a re-rating.
"We have a 'buy' rating on Macrotech Developers (LODHA), Oberoi Realty, Prestige Estates Projects, Brigade Enterprises, Sobha, and Mahindra Lifespace Developers and are 'neutral' on DLF and Godrej Properties. LODHA, Prestige Estates Projects and Brigade Enterprises are our preferred picks," said Motilal Oswal.
Brokerage firm Kotak Institutional Equities (Kotak Securities) believes the Indian listed real estate developers are poised to witness healthy growth due to improving sales, market share gain and rising real estate prices.
"Improving sales for the real estate sector at large, market share gains for organised developers, and rising real estate prices augur well for listed real estate developers," said Kotak in a report.
Kotak said Street concerns about the impact on demand in an environment of rising interest rates, as well as margin contraction due to rising input costs, might not play out owing to continued market share gains and rising real estate prices amid a buoyant demand scenario.
Considering the technical factors, Osho Krishan, Senior Analyst - Technical & Derivative Research, Angel One, pointed out that the Nifty Realty index, which has been hovering in a broad range of 410-480, is currently placed above the cluster of exponential moving averages on the daily chart.
"Once we witness a decisive breach from the mentioned range, then we might expect the index to gain traction. Meanwhile, looking at the short-term trend, dips could be seen as an opportunity for momentum traders," said Krishan.
Viraj Vyas, Technical and Derivatives Analyst of Ashika Group, observed that the Nifty Realty index has been under time and price consolidation since February 2022.
Vyas said the sector is currently attempting to make higher highs and higher lows but a strong confirmation is only above 460.
"One should wait and watch as stock-specific opportunities will present themselves but participation in a sector-wide rally is preferred," said Vyas.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
