Make long-term bets on real estate, pick firms with strong brands, low debt

If you are convinced the sector has more positives than negatives, then stick to companies with a strong balance sheet, brand and good execution record

Things seem to be improving for the real estate sector, if one goes by property consultants' reports. In the last calendar year, inventories were down, sales were higher, and more new projects came to the market than in 2017. 

According to a report from ANAROCK Property Consultants, unsold inventory hit a two-year low of 33 months in the fourth quarter (Q4) of 2018 compared to 47 months in the year-ago period. Sales grew 18 per cent. Property consultant Knight Frank India put out similar views — upward movement in sales and higher new launches. "Having absorbed a lot of impact of various structural changes, the real estate sector seems poised to grow from the previous year," said Anuj Puri, chairman, ANAROCK Property Consultants.

Improving business prospects have started reflecting in the stock prices. Over the past three months, some realty stocks have gained between 6 per cent and 40 per cent (see table). "Several real estate stocks have not performed in a long time. The downward cycle in residential real estate has been going on since 2012. Many investors are now factoring in a recovery," said Gautam Sinha Roy, associate director and fund manager, Motilal Oswal AMC. 

Experts are, however, still unsure about a revival. "I have not come across strong data which indicates so. Perhaps, we are on the cusp of a demand revival, and it may happen soon," added Roy. Others also advise investors to wait for clear indications that demand has started picking up. 

"Most developers are still struggling to sell. The customer is not buying at the current price points. That's why we have seen a correction in prices, despite improving sales. The inventory is around two to 16 times sales," said G Chokkalingam, founder and managing director, Equinomics Research & Advisory. Chokkalingam says many quality stocks outside the sector have seen a 30-40 per cent correction over the past few months, and investors are better off placing their bets on them. He was referring to the companies that have grown consistently on a year-on-year basis, have low or zero debt, and are backed by management that have a track record.

Analysts believe the interest rate cycle would have a major bearing on demand in the near future. The difference between rental yield and interest rates on home loans is a big driver. "Currently, the residential rental yield is around 2.5 per cent, and the interest rate would be around 9.5 per cent (around 8 per cent after factoring in tax deduction). This difference is on the higher side at present. As it comes down, it will kickstart a positive cycle in the sector," said Roy.

Like many others, if you are convinced the sector has more positives than negatives, stick to companies with a strong balance sheet, brand and good execution record. "After the Real Estate (Regulation and Development) Act and the goods and services tax, the larger players are better placed to do well as the sector turns more transparent. Customers, too, now prefer larger developers with better execution capabilities and track records. We will see consolidation in the industry, and bigger developers are likely to be the major beneficiaries," said Param Desai, vice-president, Elara Capital.