 "Real estate stocks present pockets of opportunity")
A home or purchasing real estate is one of the biggest investments a person makes in a lifetime. The recent announcement by the Reserve Bank of India (RBI) barring banks from lending to real estate developers under 80:20 or 75:25 schemes has come at a time when the sector is already reeling from an inventory pile-up, amid an economic slowdown.
“The timing could not have been worse. This is a period in which consumer spending is generally higher, and developers often announce schemes that could help them sell high-priced apartments; 80:20 was one of such schemes,” said Ashutosh Limaye, head – research & REIS, Jones Lang LaSalle India.
Add Aashiesh Agarwaal and Akshay Rao of Edelweiss Research: “One area of concern is the rising inventory levels, with Mumbai and National Capital Region (NCR) exhibiting elevated levels of around 41 inventory months. After strong launches and stable sales, Bangalore inventory levels, too, have increased to around 31 months from around 23 months during the fourth quarter of FY13.”
Given the overall slowdown in the economy, outlook for interest rates and the other macroeconomic challenges, investors have punished stocks from this space. HDIL, Kolte Patil Developers, Unitech, Oberoi Realty, DLF and Sobha Developers have slipped between 44 and 69 per cent in the first eight months of 2013.
The CNX Realty index has lost 49.3 per cent during this period as compared to a 5.2 per cent fall in the S&P BSE Sensex and an 8.5 per cent dip in the CNX Nifty. However, with the sharp market recovery in September, some of the stocks in this space have recovered one–27 per cent.
More pain?
While developers are saddled with high inventory, given the current macroeconomic condition, analysts feel there can be a correction in property prices, albeit selectively.
“A marginal correction in the prices of certain projects aimed at the mid-income segment is not entirely out of the question. If it occurs, it would be within a range of 12–18 per cent, depending on specific projects and their builders’ holding capacity and financial strength. A correction in prices beyond this level would affect developers’ profitability to a non-acceptable extent,” points out Limaye.
Adds Hansraj Singh, an analyst tracking the sector with IDBI Capital: “Price correction is a micro-market phenomenon. We are positive on the Bangalore market but not on Mumbai, Ahmedabad and Gurgaon. In Mumbai, developers are not ready to slash prices and the market remains sluggish. However, over the next three-four years, there can be a change in this cycle with an improvement in the overall macroeconomic condition and buyers’ affordability.”
Points out Parikshit Kandpal, an analyst with Karvy institutional Equities: “Markets in southern India continue to be stable. As of now, there has not been any serious price point pressure. The demand from NRI (non-resident Indians), which typically used to be 20–25 per cent, has inched up close to 30 per cent now, given the rupee-dollar equation.”
Besides, the market still remains affordable and the prices have not skyrocketed. Quality developers like Puravankara Projects, Sobha Developers and Prestige Estates have still been able to sell. In the current scenario, people turn a little cautious on poor quality developers. Even if there is a discount, they will opt for a better quality product.”
“In the NCR (National Capital Region), the volumes have been tepid. I think 15 per cent price correction is required to see a volume pick-up. Prices in peripheral areas like Greater Noida have cracked due to huge supply, which are typically investor driven flats. While the high-end properties have not seen a crack, the mid-income segment has felt some pain,” he adds.
Stock strategy
So, what should your stock strategy be then? Should you use this opportunity to buy these stocks, stay invested to ride the upturn in the real estate and the economy?
Analysts suggest that valuations across the space are attractive, and have factored in most of the potential risks. While most analysts remain cautious on this space, they suggest there are pocket of opportunities in this sector if one is willing to hold for the long-term.
“One needs to be selective while in vesting in this space. We continue to remain bullish on (south-India based) Sobha Developers and Prestige Estates; in Mumbai we remain positive on Oberoi Realty and DLF in the NCR. One can expect returns of upwards of 20–30 per cent in the next six to nine months,” Kandpal of Karvy says.
Agarwaal and Rao of Edelweiss like DLF for its strong annuity portfolio and high value land parcels; Oberoi Realty for its strong valuations, healthy balance sheet and triggers of new project launches and Mahindra Lifespace, for its attractive land parcel additions and strong corporate governance.
Though Singh of IDBI Capital maintains a cautious stance on the sector, he is positive on Oberoi Realty and Sobha Developers.
“The timing could not have been worse. This is a period in which consumer spending is generally higher, and developers often announce schemes that could help them sell high-priced apartments; 80:20 was one of such schemes,” said Ashutosh Limaye, head – research & REIS, Jones Lang LaSalle India.
Add Aashiesh Agarwaal and Akshay Rao of Edelweiss Research: “One area of concern is the rising inventory levels, with Mumbai and National Capital Region (NCR) exhibiting elevated levels of around 41 inventory months. After strong launches and stable sales, Bangalore inventory levels, too, have increased to around 31 months from around 23 months during the fourth quarter of FY13.”
Given the overall slowdown in the economy, outlook for interest rates and the other macroeconomic challenges, investors have punished stocks from this space. HDIL, Kolte Patil Developers, Unitech, Oberoi Realty, DLF and Sobha Developers have slipped between 44 and 69 per cent in the first eight months of 2013.
The CNX Realty index has lost 49.3 per cent during this period as compared to a 5.2 per cent fall in the S&P BSE Sensex and an 8.5 per cent dip in the CNX Nifty. However, with the sharp market recovery in September, some of the stocks in this space have recovered one–27 per cent.
More pain?
While developers are saddled with high inventory, given the current macroeconomic condition, analysts feel there can be a correction in property prices, albeit selectively.
“A marginal correction in the prices of certain projects aimed at the mid-income segment is not entirely out of the question. If it occurs, it would be within a range of 12–18 per cent, depending on specific projects and their builders’ holding capacity and financial strength. A correction in prices beyond this level would affect developers’ profitability to a non-acceptable extent,” points out Limaye.
Adds Hansraj Singh, an analyst tracking the sector with IDBI Capital: “Price correction is a micro-market phenomenon. We are positive on the Bangalore market but not on Mumbai, Ahmedabad and Gurgaon. In Mumbai, developers are not ready to slash prices and the market remains sluggish. However, over the next three-four years, there can be a change in this cycle with an improvement in the overall macroeconomic condition and buyers’ affordability.”
Points out Parikshit Kandpal, an analyst with Karvy institutional Equities: “Markets in southern India continue to be stable. As of now, there has not been any serious price point pressure. The demand from NRI (non-resident Indians), which typically used to be 20–25 per cent, has inched up close to 30 per cent now, given the rupee-dollar equation.”
Besides, the market still remains affordable and the prices have not skyrocketed. Quality developers like Puravankara Projects, Sobha Developers and Prestige Estates have still been able to sell. In the current scenario, people turn a little cautious on poor quality developers. Even if there is a discount, they will opt for a better quality product.”
“In the NCR (National Capital Region), the volumes have been tepid. I think 15 per cent price correction is required to see a volume pick-up. Prices in peripheral areas like Greater Noida have cracked due to huge supply, which are typically investor driven flats. While the high-end properties have not seen a crack, the mid-income segment has felt some pain,” he adds.
Stock strategy
So, what should your stock strategy be then? Should you use this opportunity to buy these stocks, stay invested to ride the upturn in the real estate and the economy?
Analysts suggest that valuations across the space are attractive, and have factored in most of the potential risks. While most analysts remain cautious on this space, they suggest there are pocket of opportunities in this sector if one is willing to hold for the long-term.
“One needs to be selective while in vesting in this space. We continue to remain bullish on (south-India based) Sobha Developers and Prestige Estates; in Mumbai we remain positive on Oberoi Realty and DLF in the NCR. One can expect returns of upwards of 20–30 per cent in the next six to nine months,” Kandpal of Karvy says.
Agarwaal and Rao of Edelweiss like DLF for its strong annuity portfolio and high value land parcels; Oberoi Realty for its strong valuations, healthy balance sheet and triggers of new project launches and Mahindra Lifespace, for its attractive land parcel additions and strong corporate governance.
Though Singh of IDBI Capital maintains a cautious stance on the sector, he is positive on Oberoi Realty and Sobha Developers.