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The formation of the new government has spurred the housing demand in India and optimism among real estate investors with the expectations of stability and policy continuity. The soon to be announced budget 2024 too is anticipated to reform GST structure and reduce taxes for lower income brackets to stimulate consumption. Riding on these positive factors, the Indian realty stocks are showing bullish trend. Adding to their performance on the Sensex is the pent-up demand and limited supply across cities. As per recent survey, the residential real estate sector has continued its growth momentum with 14% growth in absorption for top-7 cities in FY24 and realizations grew by 10%. As supply continues to lag the demand, the gradual price hikes will continue keeping demand momentum intact.
With steady interest rates and affordability, the industry is likely to maintain healthy growth at least in the near term. The outperformance by listed players is expected to continue given that most of them are actively foraying in new markets, says Motilal Oswal Financial Services report.
The Realty index has caught up with strong pre-sales performance reported by companies since the beginning of CY22 and large part of expected growth over the next two-three years is yet to reflect in valuations. Growth was driven by 35% increase in new launches to INR1t of which 53% were absorbed during the year and contributed 60% to pre-sales. Further, absorption rate (bookings divided by inventory + launches), improved for third consecutive year and stood at 53% in FY24 versus 48% in FY23 despite a healthy growth of 14% witnessed in blended realization.
“The listed universe is set to witness further pick-up in launches in FY25 to INR1.4t (up 40% YoY) as most of the players have less than 12 months of inventory now. Hence, despite high base we expect our coverage universe to deliver 26% YoY growth in pre-sales in FY25. If companies sustain the absorption rate clocked in FY24, they would deliver 36% growth and surpass the FY25 pre-sales guidance/estimate by 15%,” the report points out.
Some finance experts also believe that real estate sector is relatively undervalued, and just might see a rise on the back of the new government's continued focus on infrastructure and anticipated announcements on people-friendly income tax structure.
The realty stocks could see further momentum going forward, given the strong demand outlook, Kotak Securities said. “The industry's existing inventory is at a multi-year low, and new launches are continuing to garner strong demand. We expect the sales momentum to continue unabated in fiscal 2025, and therefore the valuations for most residential real estate stocks stand at the higher end of their past trading range, reflecting the strong underlying business performance and changing investor interest. Giv- en the sector's strong performance over the last 18 months, much of the positive outlook is already factored in, making the risk-reward balance less favorable.”
Factors Influencing Realty Index Performance
Like gold, real estate is considered to be a historically proven hedge against inflation and as gold investment is not risk-free, so is real estate. First and foremost, the economic indicators such as GDP growth and interest rates impact the market sentiments. Ongoing property prices and rental rates too determine the realty stocks. Most importantly, as financial advisors told, availability of credit influences property development and transac- tions, and low interest rates boost real estate demand as it reduces borrowing costs for the realty companies. Government Policies, tax incentives, zoning laws, and subsi- dies impact property values; so too, global political and economic events influence domestic capital markets and realty stock performance.
As per Motilal Oswal, while the Realty Index has jumped three-fold since the RBI took a pause in rate hikes in Apr’23, it has just caught up to strong pre-sales performance reported by companies since the beginning of CY22. It is trading at a 10% premium to pre-sales growth.
Like gold, real estate is considered to be a historically proven hedge against inflation and as gold investment is not risk-free, so is real estate. First and foremost, the economic indicators such as GDP growth and interest rates impact the market sentiments. Ongoing property prices and rental rates too determine the realty stocks. Most importantly, as financial advisors told, availability of credit influences property development and transac- tions, and low interest rates boost real estate demand as it reduces borrowing costs for the realty companies. Government Policies, tax incentives, zoning laws, and subsidies impact property values; so too, global political and economic events influence domestic capital markets and realty stock performance.
As per Motilal Oswal, while the Realty Index has jumped three-fold since the RBI took a pause in rate hikes in Apr’23, it has just caught up to strong pre-sales performance reported by companies since the beginning of CY22. It is trading at a 10% premium to pre-sales growth.Thus, a large part of expected growth over the next two-three years is yet to reflect in valuations. LODHA, GPL, PEPL, BRGD, SOBHA, DLFU, MLDL, and OBER are their top picks.
Ways To Invest In Realty Stocks
Unlike direct property ownership, real estate stocks allow investors to participate in the real estate market and gain potential returns through capital appreciation. Those who are looking for diversification and long-term growth and understand the cyclical nature of real estate markets may find these stocks appealing.
With the bounce back of the real estate markets, the suitable political and economic conditions and most of all buoyed by the significant increase in sales, quite a few property developers have gone public in last 2-3 years. Signature Global, Puranik, Kalpataru, Rustomjee, Runwal, to name a few.
In addition, Real Estate Investment Trusts (REITs) and small & me- dium REIT (SM REITs) provide an alternative investment opportunity to gain exposure to the real estate market. While, real estate stocks is part ownership in a company, REITs pool funds from multiple investors to invest in a diversified portfolio of income-generating real estate assets. REITs have the added advantage of being traded on stock exchanges and offering income-oriented investors regular dividend payouts. There are three REITs backed by office assets -- Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust--- and one retail asset backed REIT named Nexus Select Trust and six SM REITs have recently listed including hBits, EFC (I) Ltd, Strata and WiseX that will provide an opportunity for small office developers to monetize their investments.
Both Real estate company stocks and REITs offer investors a diversification of their portfolio with flexibility of good returns and liquidity. However, investing in realty index is akin to any other market investments and requires careful consideration on part of the investors.An important factor to keep in mind while investing in real estate stocks, is the prevailing market conditions, regulatory environment, supply and demand dynamics and price trends. The company’s area of opera- tions, financial performance including revenue growth, profitability, and debt levels should also be assessed.
The experts also suggest evalu-ating the developments undertaken by the real estate firm and assessing the demand and supply and pricing dynamics in those segments before investing. The same follows for the REITs, though they have an additional advantage of generating income over the years.
Realty Stocks Hedge Against Inflation
As per Anarock Residential real estate prices have risen continuously since 2013, and in the last two years, appreciated at a CAGR of 13% while CPI inflation moderated by 1.3% on an annual average basis to 5.4% at the end of FY24. The trend signifies a clear outperformance of real estate prices compared to inflation.
The report emphasized that for investors seeking to preserve and grow their wealth amidst inflationary pressures, real estate has emerged as a popular hedge against this dreaded but inevitable dynamic. Steady population growth coupled with urbanization consistently fuels housing demand. As more people migrate to cities for better oppor- tunities, rising residential demand exerts upward pressure on prices.
What’s more, analysts predict that as the rate hike cycle has peaked and the government is looking at increasing consumption, the real estate is likely to see healthy growth for at least next 3-4 years. This has also prompted the listed real estate companies foray in new geographies apart from their home market, making the realty socks even more diversified.
The developers too, have a positive view of the coming years and consider an apt time for any realty firm to launch an IPO. The residential sales have jumped especially in high ticket luxury segment, inventory overhang has reduced, commercial and industrial real estate segments too are showing good activity, making it an opportune time for organized developers to tap the public markets.
Real Estate Stocks To Buy In 2024
The value of real estate stocks is tied to market conditions, regulatory changes, company performance, infrastructure, and interest rates. Diversification, performance management, dividend income, and the ability to appreciate capital are key advantages of investing in realty stocks. In 2024, the biggest market capitalists in the real estate industry, according to Religare broking are -
DLF Ltd., a major player in the Indian real estate market, focusing on housing, commercial, and retail development.
Oberoi Realty Ltd, recognized for high-quality real estate and commercial services, offering various products in real estate, retail, office space, hospitality, social, and infrastructure verticals.
Godrej Properties Ltd. is part of the Godrej Group that focuses primarily on residential development.
Prestige Estates Projects Ltd., operates primarily in South India focusing on property development and construction, office and retail leasing.
Sobha Ltd., a South India based company has a strong presence in commercial and residential real estate.
Phoenix Mills Ltd. specializes in retail and commercial real estate space, from shopping malls, entertainment centers and business centers.
Brigade Enterprises Ltd., another leading company in the South Indian has diversified portfolio including residential, commercial, and hospitality projects, exposing investors to different segments.
Mahindra Lifespace Developers Ltd., too is a diversified real estate company focused on apartments and integrated properties from residential housing, integrated townships and industrial clusters.
Sunteck Realty Ltd., is known for luxury real estate with emphasis on prime locations and high-quality products, suitable for discerning investors.
Macrotech Developers, is among the largest real estate developers in India has developed residential and commercial properties in Mumbai, Thane, Hyderabad, Pune, and London.
The value of real estate stocks is tied to market conditions, regulatory changes, company performance, infrastructure, and interest rates. Diversification, and the ability to appreciate capital are key advantages of investing in realty stocks, apart from being a popular hedge against inflation, among Indians.
