Analysts see more headroom for quality real estate stocks

Real estate sector has been a surprise performer in calendar year 2019 (CY19) at a time when most players in the segment had been, over the years, saddled with unsold inventory and liquidity issues. The Nifty Realty index has been an outperformer, rallying 19 per cent thus far in CY19, as compared to 10 per cent rise in the Nifty50. 

Analysts attribute this outperformance to a steady fall in interest rates through the year and implementation of Real Estate Regulation and Development Act (RERA) that has helped clean up the sector. On its part, the Reserve Bank of India (RBI) has cut repo rate by 135 basis points (bps) in 2019 to 5.15 per cent – a nine-year low.

Analysts tracking the sector advise investors to stick to quality names and see more upside for stocks of companies with clean balance-sheets and earnings visibility.

“RERA has helped clean-up the sector and all the weak companies have gone. The strong ones have survived the tsunami of adversities are likely to do well from here,” said A K Prabhakar, head of research at IDBI Capital. Among the lot, he remains bullish on Godrej Properties, Oberoi Realty, DLF, and Sobha.

At the bourses, most real estate stocks have given a healthy return in CY19. Godrej Properties, for instance, has rallied 37 per cent. Prestige Estate Projects (up 32 per cent), Phoenix Mills 27 per cent and DLF have been some of the other prominent gainers.

In a recent note, analysts at Morgan Stanley upgraded DLF to overweight from equal-weight, citing steady earnings visibility over FY20-FY22, new projects in the pipeline, positive cash flow visibility, strengthened balance sheet and attractive valuation. The stock hit a fresh 52-week high of Rs 226.60 apiece on the NSE. 

“DLF has restructured its business model and balance sheet to become a more focused development and rental company. From here, the spotlight will shift towards monetisation of its Rs 10,000 crore in unsold completed inventory, leading to positive free cash flow generation of nearly Rs 500 - 600 crore per annum and, potentially, further deleveraging. All this, along with reasonable valuation (40 per cent discount to our March 2021 NAV estimate) drive our rating upgrade to overweight,” wrote Sameer Baisiwala and Pooja Bhatia, analysts at Morgan Stanley tracking the company.

At the ground level, housing sales have improved 13 per cent in the first three quarters of 2019 as against the corresponding period in 2018, and by 23 per cent in that period two years ago, reports suggest. 

“In fact, housing sales have almost reached the levels we saw in the first three quarters of 2016, before demonetisation hit dented sales in the fourth quarter of 2016. The first three quarters of CY19 collectively saw sales of nearly 2.02 lakh units in top seven cities – a tad lower than 2.07 lakh units during the same period in 2016. Prices have bottomed out and are beginning to rise again – but not fast enough to entice investors into making property plays purely for capital appreciation,” says Anuj Puri, chairman, ANAROCK Property Consultants.

Building on

• The Nifty Realty index has rallied 19% so far in CY19, against a 10% rise in the Nifty50
• Top gainers include Godrej Properties, Prestige Estate Projects, Phoenix Mills, and DLF
• They have rallied 37%, 32%, 27%, and 22%, respectively