Realty stocks have been under pressure in the recent past as investors remain cautious about elevated inflation and the possibility of an imminent rate hike.
Nifty Realty index is 26 percent down from its 52-week high level while Nifty has fallen 13 percent from its all-time high. Some realty stocks such as Indiabulls Real Estate and Godrej Properties are down 46 percent and 44 percent, respectively, from their 52-week highs.
The stocks of the sector are falling even as the demand scenario remains positive. As per a report by ANAROCK Property Consultants, property registrations in Mumbai, which is the country’s most prominent real estate market, attained a record in February 2022, with the highest number of properties registered during the current fiscal year.
"According to data published by IGR Maharashtra, Mumbai saw a total of 10,379 properties registered last month - a 27 percent increase over the previous month and 2 percent more than the same period the previous year," said ANAROCK.
Real Estate sales in Mumbai had got a boost after the Maharashtra government reduced stamp duty to 2 percent for a limited period between September 2020 and December 2020. This, coupled with low-interest rates, triggered a strong interest in real estate.
In the last quarter of the fiscal year 2020-21, stamp duty increased by 100 bps to 3 percent and the Maharashtra government announced that it will levy an additional surcharge of 1 percent to the stamp duty on registration of properties from April 1, 2022.
"With positive consumer sentiments, all-time low-interest rates, and increasing homeownership sentiment, we anticipate a boost in sales and registration in the coming month before the fresh 1 percent surcharge levy begins in the next fiscal year," said ANAROCK.
What is weighing on realty stocks?
In the wake of Covid-19, there was strong uncertainty in the stock market due to lockdowns and a fall in economic indicators. In that scenario, many investors turned towards real estate as conservative investors believe properties are safe investments.
Now, as the hike in interest rates looks imminent, investors do not find the real estate option as lucrative as before.
Another factor is the recent correction in small and mid cap stocks. As most realty stocks fall in these categories, they are also witnessing selling in sync with their peers from other sectors.
"Realty stocks did very well when the small and midcap stocks were in favour and positive news flow from the sector continued to trickle in. With the overall trend of the markets turning down and small and midcaps falling out of favour, a reversal of fortunes has happened. Also, the fact that interest rates are headed higher could mean mortgage rates could rise and one of the positive triggers for the earlier rally is now no longer available," said Deepak Jasani, Head of Retail Research, HDFC Securities.
Arun Malhotra, Founding Partner and Portfolio Manager at CapGrow Capital Advisors, believes higher crude oil prices are also negative for the real estate stocks.
"Realty stocks have a dual hit on account of high oil prices. As India’s fiscal deficit deteriorates, the stocks which are leveraged are more impacted negatively. Rising crude prices have a second-order impact on the prices of raw materials for the Real estate industry. This will negatively impact the margins," Malhotra said.
"Additionally India is now is rate neutral to increasing regime. Given the elasticity of home loans to interest rates, Realty stocks have corrected," Malhotra added.
The road ahead for the sector is bumpy as not only higher interest rates will pose a challenge but the supply constraint of building materials will also weigh on.
"Supply chain challenges continue to make it difficult to obtain materials, which, along with continuing labour shortages, is driving up construction prices and schedules. Homebuilder profit margins are being squeezed as a result of this," said Vijay Dhanotiya, Researcher at CapitalVia Global Research.
"Furthermore, the possibility of rising interest rates this year to help control inflation will raise mortgage rates. Buying a property would become even more expensive as a result, perhaps depressing demand. Homebuilders may face these headwinds this year, which is why their stock values have fallen," Dhanotiya added.
Should you buy realty stocks?
The pent-up demand post-Covid-19 has eased and the realty sector is going through consolidation which is showing large players getting stronger. Yash Gupta- Equity Research Analyst, Angel One, pointed out that one should be selective on the sector as some stocks are falling more because of company-specific issues.
"Till now there is no clarity on Embassy One merger with Indiabulls Real Estate which is negative for the stock. Godrej Properties is suffering because of FPI selloff as FPIs hold a significant stake in the stock," Yash Gupta- Equity Research Analyst, Angel One, pointed out.
Gupta recommends an overall buy on the sector, however, he suggests two names - Sobha and Oberoi Realty - to pick from the sector.