Realty stocks' rally is riding on hope; brokerages to be bullish on sector

Look at sectors like housing finance, material suppliers that would benefit from recovery in housing

The BSE’s real estate index has been consistently outperforming the S&P BSE Sensex. In the past month, the Sensex grew 3.6 per cent, the realty index was up 11.9 per cent. And this is not a one-month phenomenon. The BSE realty index rose 99.3 per cent in the past year while the Sensex delivered returns of 28.9 per cent.

Many brokerages continue to be bullish on the sector. In a recent report, ICICI Securities says that lower interest rates on home loans, correction in property prices over the last two years, and the government’s push on housing will lead to organised developers gaining market share. “Over the last three years there has been a noticeable recovery in the Indian office market with record low vacancies, rentals rising by 50 per cent over the last 36 months in preferred micro-markets,” says the report. Even international brokerage CLSA feel that a housing boom is imminent due to the same reasons and real estate regulator boosting confidence among home buyers.

While all things point towards a positive outlook for the sector and the companies, investment managers don’t believe that the run-up in real estate stocks justifies the fundamentals. They caution investors to be selective when picking up individual stocks and look at companies with a strong balance sheet. “I may look at a Godrej Properties or Oberoi Realty. But I will not be looking at all the stocks in this sector," Arun Kejriwal, director, Kris Securities.

While the Real Estate (Regulation and Development) Act, 2016 (RERA) would boost buyers’ confidence and demand, it’s also going to impact developers’ cash flows in the near term due to the higher cost of compliance. Earlier, developers could start selling a project before they got sanctions and approval. It helped them to secure cash flows even before the project started. After RERA, the developer must bear the initial costs of getting approvals and starting construction. Also, the government is pushing for reforms in affordable housing. Most of the sales at present are in this segment. But Kejriwal points out that most big listed builders are not in this segment. So, what’s pushing up the stock prices then?  “Investors are expecting that in the upcoming Budget there could be more sops for housing that would benefit these companies,” says Rakesh Tarway, head of research, Reliance Securities.

Some feel that it’s more of speculation. Investors are taking a position on hoping to make money when the segment starts doing well. G Chokkalingam, founder, Equinomics Research and Advisory, points out that the float of many listed realty stocks is also low. Rising interest but limited availability is also pushing up prices. “There has not been any significant increase in sales until September quarter end. Stocks of some companies that are doing well had inventories four times their annual sales in the July-September quarter,” says Chokkalingam.

Analysts say if investors hope for recovery in housing, they should look at other sectors that would be directly impacted when sales start to pick up. Some of these include housing finance companies, cement, companies that supply materials, and so on. There are more companies with a better balance sheet in these segments and real estate recovery will see their earnings grow as well. Tarway suggest that investors can also look at companies that supply material such as tiles, plywood and cement. One can also look at housing finance companies. “Companies in these segments have also started doing well due to pick up in demand for housing,” says Tarway.