After a better-than-expected performance in a seasonally weak July-September quarter (second quarter, or Q2) in 2022-23 (FY23), the sales momentum in the real estate sector continues to remain resilient. In addition to maintaining growth, listed realty players are gaining market share and raising prices, offsetting some of the pressure from higher interest rates and rises in input costs.
For realty majors, sales growth in Q2FY23 was up about 8 per cent sequentially and 29-31 per cent, compared with the year-ago quarter.
Analyst Rupesh Sankhe of Elara Capital says the quarter demonstrated strong performance, in contrast with a typically soft Q2. Further, robust residential sales through nine months of this calendar year (CY22) have already exceeded pre-Covid annual sales and are on course to breach the 2014 peak, he adds.
Even for the broader real estate market, residential sales across the country increased 24 per cent year-on-year (YoY) to 190 million square feet (msf), with all regions witnessing strong demand.
Analysts Murtuza Arsiwalla and Prateek Barsagade of Kotak Institutional Equities (KIE) point out that this is the fifth consecutive quarter of sales above 150 msf, signalling strong underlying demand.
Housing demand remains strong even after Q2, with growth in the top seven cities up 13 per cent YoY and 3 per cent month-on-month (MoM) in October.
Even as supply (new launches) is down, demand continues to remain upbeat, leading to a fall in inventory.
Say analysts Parvez Qazi and Vasudev Ganatra of Nuvama Research, “Launches continued to decline, falling 39 per cent MoM and 53 per cent YoY, and were the lowest in 18 months. For year-to-date CY22, demand shot up 33 per cent, while supply was up 18 per cent YoY.”
Given these trends, the inventory months fell to 19 in October this year, compared with 27 months in October of last. Analysts believe demand growth will sustain and absorption will continue to be healthy, aided by high levels of affordability, notwithstanding the increase in mortgage rates/housing prices.
Pricing power remains strong thus far. Revenue growth in the September quarter was largely led by pricing rather than volume growth.
Analysts Pritesh Sheth and Sourabh Gilda of Motilal Oswal Research point out that the blended realisations for the top 12 listed realty companies witnessed 25 per cent YoY growth in Q2, indicative of cost pressures having been fully passed on.
Mortgage rates have risen 170 basis points in six months, leading to a 15 per cent rise in equated monthly instalments, or a 10-year increase in the tenure for a Rs 1-crore home loan.
While the Street is concerned about the impact on demand in an environment of rising interest rates, as well as margin contraction due to rising input costs, KIE says the same may not play out, owing to continued market-share gains and rising real estate prices amid a buoyant demand scenario.
The market-share gains for the top players will sustain, even as smaller players are held back by higher construction/capital costs.
Nuvama Research expects companies with sizeable land banks, such as DLF, Sobha, and Macrotech Developers (Lodha Group), to benefit from a rerating as investors become increasingly confident about the housing sales trajectory.
For Motilal Oswal Research, the preferred picks are Macrotech, Prestige Estates Projects, and Brigade Enterprises. It prefers players that possess the inherent ability to generate robust cash flow over the next three-four years and invest in developing their pipeline, providing further growth visibility and triggering a rerating.
Elara Capital, too, has a positive view of the listed players, given the consolidation in the industry, led by changing consumer preference towards quality offerings from large, credible players. It has a ‘buy’ rating on Oberoi Realty, Sobha, Mahindra Lifespaces, and Godrej Properties.
The BSE Realty Index has marginally underperformed the BSE Sensex since the start of October. Given the healthy outlook and market-share gains for listed players, investors can consider the picks on dips.