DLF, Prestige, Sobha: CLSA downgrades select realty stocks. Here's why

Most positive factors in terms of a pick-up in housing demand and office space absorption, CLSA said, are already priced in.

CLSA has downgraded select real estate stocks and expects most counters from this sector to consolidate in the months ahead after the sharp run seen in them in the last few months. Most positive factors in terms of a pick-up in housing demand and office space absorption, it said, are already priced in.

“We expect housing industry demand to grow around 12 per cent in 2024 and for large developers to outpace industry to grow at 15 - 20 per cent. However, property stocks have gone up sharply over the past three months and our reverse discounted cash flow (DCF) valuation implies very high growth built into current prices, which we believe will be difficult to achieve considering cyclicality,” wrote Kunal Lakhan and Alekhya Mididoddi of CLSA in a recent note.

Among specific stocks in the realty pack, CLSA has downgraded DLF to sell (from outperform earlier), Prestige Estates to outperform (buy) and Sobha to sell (buy).

"DLF and Sobha are the only large stocks who have prevailed from the last upcycle. We assert that currently they are trading at 18-29 per cent premium to their net asset values (NAVs), which is higher than around 15 per cent premium they had traded during the peak of the last cycle in 2008-09. Maintain our 'Sell' rating on Macrotech, Godrej Properties and Oberoi Realty and a 'Buy' rating on Sunteck," the note said.

In the last one year, the Nifty Realty index has outperformed the markets by a huge margin, rallying nearly 93 per cent as compared to around 18 per cent rise in the Nifty 50 index during this period. Prestige Estates, Sobha, Brigade Enterprises and DLF have surged between 100 per cent and 172 per cent in the last 12 months, shows ACE Equity data.

Housing sales

CLSA's negative stance on real estate stocks comes despite a rise in housing sales amid firm interest rates. According to ANAROCK - a real estate consulting firm, top 7 cities in the country - the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bengaluru, Pune, Hyderabad, Chennai and Kolkata - saw housing sales totaling 476,530 units in 2023 as against 364,870 units in 2022.

The MMR, ANAROCK said, witnessed the highest sales of approximately 153,870 units in 2023, followed by Pune with nearly 86,680 units. The two western markets together led residential sales in 2023.

Average home prices, according to Anuj Puri, chairman, ANAROCK Group, are likely to appreciate by 8-10 per cent across the top 7 cities in the year ahead.

2024, according to Colliers International, is expected to be the year of consolidation for the office real estate vertical. Occupier needs, it believes, will continue to evolve and market offerings will continuously realign themselves. Although the momentum in residential real estate is likely to continue into 2024, Colliers believes the base effect may come into play and thus growth in sales, launches and prices will remain moderate.

“Demand- supply equilibrium will keep vacancy levels range-bound lending room for rental upside in the office segment. With adequate inventory and uptick in ready to occupy property supply, the residential market is likely to be evenly balanced between homebuyers and developers. Developers with a track record of timely execution of projects will continue to see good traction in the market,” said Badal Yagnik, chief executive officer, Colliers India.

CLSA, meanwhile, expects housing demand to grow by around 12 per cent in 2024, mainly driven by a comeback of affordable housing demand driven by decline in rates. Growth in the luxury segment, it said, is likely to slightly moderate, due to sharp increase in prices, and expects growth in the middle-income segment to slightly improve led by decline in rates.

“We expect interest rates to decline by around 100 basis points (bps) by June 2025, which will improve the affordability for buyers in the affordable housing segment,” Lakhan and Mididoddi of CLSA wrote in the note.