Nifty Realty has lost nearly 7 percent in 2023 and 10 percent in the last 1 year. The benchmark started underperforming in September when the hike in interest rates started gathering pace. Just in September 2022, the index lost 8 percent.
It has also been in the red in both months of 2023, down 2.3 percent in Feb so far and 4.7 percent in January.
The decline in the index mainly comes on the back of rising interest rates which has in turn led to higher home loan rates and hence a decline in consumer demand. Also, with most offices continuing the hybrid work model, the demand in the consumer real estate space is also lacking.
It is also important to note that after hitting its peak in 2008, the Nifty Realty index has never regained. It is still down around 80 percent from its record high of 2008. This is mainly on the back of more supply of real estate than demand.
The index hit a record high of over 1,800 levels in 2008 but has been in a downward trend ever since. Post 2008, the highest level, it has ever tough is around 520 levels in 2021 after the consumer demand recovered post the COVID pandemic.
Currently, the index is trading around 400 levels, which is still around 80 percent down from its 2008 peak.
In the last 1 year, all Nifty Realty constituents, except 2, have given negative returns to their investors. Phoenix Mills and DLF rose 32 percent and 6 percent, respectively, while Indiabulls Real Estate was the biggest loser, down 47 percent in the last 1 year. Macrotech Developers, Godrej Properties, Suntech Realty, and Sobha also lost over 20 percent each in this period.
Sunil Damania, chief investment officer, Marketsmojo believes that the Nifty Realty Index is likely to remain slightly lower going ahead. Firstly, the interest rates have been steadily rising, putting an added financial burden on potential customers who are looking to buy into the real estate sector. RBI has recently hiked rates and one more rate hike is expected in April.
Secondly, the pent-up demand and lack of supply that arose due to Covid have now abated. The number of launches has increased suggesting there would be more supply than demand, noted Damania.
"Both these factors taken together are likely to cause the Nifty Realty Index to remain at a lower level. Since the close of 2021, the BSE Realty index has given 15 percent negative returns. Historically, when the supply of real estate far exceeds the demand, the price remains relatively low, which has an adverse impact on the realty index. We believe that this trend will continue in the future, resulting in the realty index continuing to underperform," he said.
However, Deepak Jasani, Head of Retail Research, HDFC Securities is positive about the outlook of the realty space.
According to Jasani, realty companies see housing demand remaining strong, and expect the impact of rising mortgage rates to remain temporary. Inflation and the actions taken by central banks will be the two most important signals to focus on, he noted.
Jasani further pointed out that the mortgage rates have seen a sharp uptick in the past few months, but the starting point was the lowest level India has ever witnessed. There may be a couple of more hikes from the central bank in coming quarters but these rates may start to decline in coming years given the favorable macro-economic situation, he highlighted.
"With the recent interest rate hikes, loan eligibility has reduced, resulting in a larger funding requirement for down payments. The all-time high affordability is still aiding demand. We believe developers would not take price hikes now and support recovery," he rationaled.
Vinit Bolinjkar- Head of Research - Ventura Securities is also bullish on the real estate market and believes that Nifty Realty is expected to pick up in the coming months.
"After 2 years of being affected by COVID, the residential real estate market in India recorded 68 percent YoY growth in 2022. An increase in earning potential and a growing base of aspirational consumers have led to substantial growth in the sector. Furthermore, the infrastructure improvement in cities and the development of new townships near the corporate centres have accelerated the growth. In addition, the development of affordable housing and favourable government initiatives have supported low-ticket real estate volume," Bolinjkar explained.
Ronald Siyoni, Associate Vice President at Sharekhan by BNP Paribas also remains positive on the realty sector owing to structural triggers such as rising income levels, decadal affordability levels, and industry consolidation among others. The recent correction offers buying opportunities, he advised.
Siyoni pointed out that the Nifty Realty index started underperforming the Nifty benchmark index in mid-September when we saw a hike in interest rates gathering pace. Although realty companies continued to report healthy pre-sales during December 2022 quarter despite the interest rate hikes barring a few companies which had lower launches, he said.
He believes as we peak out the interest rate cycle, the realty index should start outperforming the Nifty benchmark index. His top picks in the sector are Macrotech Developers, DLF, Oberoi Realty, Prestige Estates and Mahindra Lifespaces.