Nifty Realty Riding High: What's Next?
Even as the index is still 29% away from its all-time high, here is a look at what drove the advance.
Emerging as one of the best performing sectors, Nifty Realty hit a 14-year high on Dec. 15, gaining 74% in the last 12 months. But is there more room for the rally?
While the index is still 29% away from its all-time high of 1,000 points, analyst price targets suggest the stocks of top developers have already surpassed expectations with some trading at a premium to historical valuations.
Sentiment, however, stays strong and developers anticipate the momentum to continue. Home sales, spurred by the pandemic, have been driven by demand for luxury homes. And the sector's resurgence after a prolonged slowdown has triggered a rally in realty stocks.
Industry Consolidation
The implementation of the Real Estate (Regulation and Development) Act has aided in driving the market share of branded players in the sector, with the weak and unorganised players unable to adhere to the compliance norms.
The share of new launches by tier-1 developers increased from 41% in 2015 to approximately 56% in 2018, according to Anarock.
HSBC sees further consolidation in 2024, as branded players are increasingly adopting joint development to bring projects faster to the market.
Strong Pre-Sales Growth
The top 12 listed real estate companies witnessed sustained demand traction as they delivered 36% YoY growth in pre-sales to reach Rs 427 billion in first half of FY24, said Motilal Oswal Financial Services Ltd.
Companies like Puravankara Ltd. were in focus after reporting 102% YoY growth in pre-sales to Rs 1,600 crore.
Higher realisations and lower leverage could also be contributing factors.
Stocks Touching All-Time High
DLF Ltd., Godrej Properties Ltd. and Oberoi Realty Pvt. stocks hit fresh 52-week highs on Dec. 15. Macrotech Developers Ltd. (Lodha), Oberoi Realty, Brigade Enterprises Ltd. and Prestige Estate Projects Ltd. hit an all-time high.
Peer Comparison
The rally also means some of the top developers are now trading above their historical valuations.
Brigade, Oberoi Realty and Phoenix Mills Ltd. are still trading below the three-year average multiple. DLF, Mahindra Lifespace Developers Ltd., Prestige Estates and Sobha Ltd. are trading above the three-year average valuation.
Prestige Estate has outperformed its peers in terms of stock returns.
Launch Expectations
Nifty Realty is in the upswing cycle as indicated by the demand growth outpacing supply growth.
Analysts at HSBC expect CY24 to see steady volume, but launches will likely outpace demand as developers are gearing up to launch more, wanting to capitalise on the unprecedented demand. Motilal Oswal expects launches to double in second half of FY24.
Analysts expect the index's coverage universe to deliver 30% YoY growth in pre-sales in FY24, as compared with an initial growth guidance of 15-20%.
Interest Rate Cut Expectations
A majority of listed developers have taken steps to reduce debt levels of their company. However, the sector continues to remain interest rate sensitive. Indian real estate stocks have been more sensitive to the interest rates trend, and could benefit from rate cuts, said HSBC.
