Brokerage house Motilal Oswal remains bullish on the real estate sector despite a decline of 23 percent in the Nifty Realty index in 2022 YTD. As per MOSL, rising interest rates are likely to have a sentimental impact in the near term while strong demand and a healthy pipeline will aid the growth of the sector in FY23.
The brokerage noted that while rising interest rates are likely to have a sentimental impact on the sector in the near term, in a scenario with higher construction costs and cost of capital and constrained industry growth; larger developers will further consolidate their market share.
MOSL continues to prefer players with an ability to generate robust cash flow over the next three-to-four years and investing in developing their pipeline, which will provide further growth visibility and a lead to a re-rating.
Among stocks, it has buy calls on Lodha and Oberoi Realty, while it is Neutral on DLF and Godrej Properties.
In 2022 so far, all Nifty Realty constituents (Except Phoenix Mills) have delivered negative returns to their investors. Indiabulls Real Estate has lost the most, over 60 percent, followed by Sobha, Godrej Properties, and DLF, which tanked between 20-45 percent each. Meanwhile, Oberoi Realty, Lodha and Prestige Estates also shed over 10 percent each in this time.
Despite the poor stock performance recently, the brokerage noted that the March quarter was a record quarter, with many developers reporting their best ever presales/collections.
“The top 10 listed developers delivered a 48 percent YoY growth in pre-sales, which led to a marginal increase in volume/value share,” it said.
Going ahead, MOSL believes that this trend is likely to accelerate further on account of a healthy launch pipeline, cost inflation, increase in the cost of capital, and constrained demand due to higher mortgage rates. This is likely to work in favor of larger developers, leading to further market share gains, it added.
It further highlighted that the developers are targeting double-digit growth in presales in FY23.
The brokerage further noted that on the cost front, most companies witnessed a 12-15 percent rise in construction costs. Since the same constitutes just 25-40 percent of the sale price, the overall impact on margin is restricted to 3-6 percent, it explained.
Further, it said that the companies have mitigated this cost impact via price hikes of 5-8 percent in FY23 and are looking to raise prices further to improve margin.
Meanwhile, in a rising interest rate environment, companies see an impact only once mortgage rates cross 8-8.5 percent.
"The rise in interest rates was imminent. However, with no respite on inflation globally, the quantum of increase remains uncertain. Developers agree that a sub-8 percent mortgage rate is unlikely to have any material impact on demand," noted MOSL.
However, as per MOSL, key risks to the upside include a sharp rise in mortgage rates and higher inflation can lead to a marginal push out in demand in the near term and also developers’ inability to raise prices further.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
