Realty's Reign Cracks As Index Records Biggest Monthly Decline In 18 Months

Nifty Realty, the top performing sectoral index over the last year, fell 3.7% in August, recording its worst month since February 2023. Analysts maintained a consensus belief that the decline can be attributed to a short term correction, rather than a signal for further decline. But supply related concerns loom.

"Some correction was necessary, given the rally seen by the index," said Vishal Bhargava, a market expert who tracks the real estate sector.

The sector had come of a long period of consolidation, after a 14-year period where the index delivered little-to-no returns.

The index began its climb in April 2023, and grew nearly 200% — a threefold return at its peak two months ago.

As the real estate cycle began anew, the sector led gains amid Indian equities' bull run last year, with Sobha Ltd. and Prestige Estates Projects Ltd. as the top performers in the index during the financial year so far.

Shares of the two index constituents rose over 400% and 380%, respectively, in this period.

But with the index shedding some gains after hitting its highest level in 15 years, investors are left wondering if they should book profits, or hope for a recovery.

An expectation that volumes for listed players in the sector may not follow the strong growth trajectory that has been recorded in the past few quarters, due to a build-up of supply, according to Bhargava.

"The number of projects being handled by these developers has increased steadily, but so has the duration of the sales cycle, as the time to close a deal becomes longer," he said.

The real estate segment should continue to have a strong run over a long period of time, if the developers get the pricing right, he said.

The sector had been in a recession for a long time, and grew substantially over the period of one year. However, it may be too soon to read into anything related to a short term decline, according to Gulam Zia, executive director at Knight Frank LLP.

"Even if time taken for completion of deals is in fact increasing, or pricing concerns are emerging, these may be considered as qualitative observations," he said. "For statistics to support this, the data will appear with a lag of a quarter, or two."

Revenue forecasts provided by the listed players have not been suggestive of a slowdown in the real estate segment, he said.

So far during calendar year 2024, launches dipped by 4% compared to the same period last year, according to Nuvama Research.

However, the trend of softness in launches reversed in July, with a 15% month-on-month rise due to a delay in April-June quarter, on account of approval-related issues because of the general elections.

Forward outlook provided by the brokerage suggests launches shall remain contained due to liquidity constraints.

While Prestige Estates Projects Ltd. reported a 23% decline in pre-sales, attributing them to election-related delays, it expects a significant pickup from next quarter onwards.

The company expects to achieve Rs 25,000 crore pre-sales by fiscal 2025 end, and it expects three to four launches in Bangalore and Mumbai to maintain this growth.

Other key players like Oberoi Realty Ltd. saw a 124% increase in pre-sales, but was impacted by a lack of new launches in the quarter.

The pre-sales momentum, however, remains on the stronger side with the Pokhran Road, Thane project on schedule for launch during the festive season.

Additionally, there are plans to launch a new tower at Borivali and Goregaon in second half of fiscal 2025.