Buy realty stocks only for the long term, say analysts

At a time when the S&P BSE Sensex and the Nifty50 indices are scaling new highs, investors in real estate stocks have seen their capital erode thus far in the calendar year 2018 (CY18), with the Nifty realty index – a gauge of the sector’s performance – underperforming the benchmark index during this period by a wide margin. 

Thus far in CY18, the Nifty Realty index has slipped 24 per cent as compared to around 6 per cent rise in the Nifty50 index till July 25. The fall in select stocks has been much sharper. HDIL, for instance, has been the worst performer during this period, slipping over 70 per cent during this period, ACE Equity data shows.

The underperformance in CY18, analysts say, has been on account of uncertain global and domestic environment saw investors focus on the large-cap stocks instead of the mid-and small-cap segment, which in turn impacted real estate stocks. That apart, off-take for units remained has been subdued since the past few quarters, as buyers remained fence-sitters due to fear of a rise in interest rates.

“While rising income levels and relatively low mortgage rates are enablers, investors are wary of the impact of higher interest rates,” says Parvez Akhtar Qazi, an analyst at Edelweiss Research who tracks the sector.

A genuine demand recovery in the sector, experts say, is still some time away even as the prices continue to spiral down. In this backdrop, analysts say investors could make use of these adverse conditions and buy selectively, only if they have the patience to hold from a long-term perspective. 

Weighted average prices (residential) dropped an average 3 per cent across cities in the first half of calendar year 2018 (H1-2018) with Mumbai seeing the most year-on-year (y-o-y) decline at 9 per cent, suggests a recent ‘India Real Estate’ report by Knight Frank.

“Prices have been on a downward trend since the past four years and it will take time for the markets to recover. It will be another two years before this bearish phase gets over,” says Mudassir Zaidi, executive director – north at Knight Frank.

The credibility of the developer, his financial track record and fund availability for ongoing and proposed projects are key factors to consider before taking an investment call.

“At the ground level, consumers are preferring clean and transparent developers. There is a clear shift towards credible players and ready to move in units as compared to under-construction projects,” Zaidi adds.

Qazi of Edelweiss believes the current scenario is an opportunity for the organised players who are benefiting from RERA-driven consolidation in the sector. He expects volume recovery for organised players to continue going ahead.

Analysts at UBS, however, suggest RERA implementation has been slow and awareness among consumers is much lower-than-expected.

“We think India’s residential real estate sector is at the cusp of a gradual demand revival aided by affordability at 15-year-best levels, high expectations of property price increases over the next one to three years, reasonable comfort on personal finances and implementation of new regulations aimed at regaining buyer confidence. Improvement in current subdued job creation/income growth outlook could lead to even faster growth," write Sourabh Taparia and Gopal Ritolia of UBS in a recent report.

UBS has a buy rating on Godrej Properties, Oberoi and Prestige, while Sobha and Sunteck Realty are the top picks of Edelweiss in the realty space.