Upbeat housing demand to lift realty stocks despite rate hikes: Analysts

While rising interest rates are expected to hamper affordability among buyers, analysts expect the underlying need for homeownership to remain strong, which would buoy housing sales going ahead

After withstanding the pandemic-wrought downtrend, analysts remain optimistic on the road ahead for the realty sector on the back of strong affordability, upbeat demand, and manageable inventory levels. Though the rate-sensitive sector is prone to downside in a hawkish interest rate environment, they expect the low-leveraged realty companies to brave through the rate hike storm in the long term.

In the July-September quarter of 2022, the sales of residential properties across Delhi-NCR, Mumbai Metropolitan Region, Chennai, Kolkata, Bengaluru, Hyderabad, and Pune rose 41 per cent year-on-year (YoY) to 88,234 units, suggested data from ANAROCK. New launches, too, climbed 45 per cent YoY to 93,490 units in these seven cities during the recently concluded quarter.

At the bourses, shares of Brigade Enterprises, DLF, Godrej Properties, Indiabulls Real Estate, Oberoi Realty, Prestige Estates, Phoenix Mills, and Sobha have surged up to 28.3 per cent in the second quarter of this fiscal year (Q2FY23). In comparison, the S&P BSE Sensex and Nifty50 have gained over 8 per cent each, during the same period.

Going ahead, analysts say investors who have an appetite for risk and can digest volatility can stay put in real estate stocks. Gaurang Shah, head investment strategist, Geojit Financial Services, for instance, suggests investors stay with credible names in this sector who are on sound fundamental footing.

“One must remain cognizant about the high beta nature of the realty sector. Those investors who have a higher risk appetite can hold stocks of companies that are not highly leveraged. We are positive on DLF, Godrej Properties, Oberoi Realty, and Prestige Estates for the long-term horizon," he added.

READ MORE: No material impact of rate hike on demand for home loans: RBI data

Housing demand

At the fundamental level, analysts expect the housing demand momentum to sustain going ahead despite the spike in residential property prices and firming interest rates. The residential property prices registered a rise of 1-2 per cent quarter-on-quarter (QoQ) in the July-September period and were up around 4-7 per cent YoY.

“We expect the uptrend in property sales to sustain in the near-term and do not think that rising interest rates would hamper housing loans, which extend up to 20 years,” said AK Prabhakar, head of research at IDBI Capital.

Nishit Master, Portfolio Manager, Axis Securities, on the other hand, feels that the inventory levels are manageable and remains bullish on the road ahead for the sector in a rising interest rate regime.

“Among the lot we are positive on DLF, Mahindra Lifespaces, Godrej Properties, and Oberoi Realty from a long-term horizon," he said.

ALSO READ: Despite recessionary trends… we're talking about 7% growth: Hiranandani
 

Home loan rates

From a rising interest rate perspective, Anuj Puri, chairman, ANAROCK Group believes that the incessant rate hikes would inflate costs of raw materials like cement, steel, and labour.

That said, while rising interest rates are expected to hamper affordability among buyers, the underlying need for homeownership is expected to remain strong, which would buoy housing sales going ahead, believe analysts.

Home loan rates approaching 2019 levels, Shishir Baijal, chairman and managing director, Knight Frank India believes, will not be enough to subdue market momentum significantly. The performance of the broader economy and homebuyer sentiment, he said, will have a greater bearing on market traction for the remainder of the year as it dictates homebuyer income levels and demand much more directly.

“The cumulative increase in median home loan rate will impact affordability of homebuyers and thus their purchase decisions as well. However, with the need for homeownership still being strong, homebuyers will largely make necessary compromises by considering lower priced housing units rather than deferring their purchases as expectations of further price increases will discourage deferment,” said Shishir Baijal, chairman and managing director, Knight Frank India.

ALSO READ: PE investments in realty dip 25% in 2022 on inflation, interest rate spike