Robust Q2, demand trends to put out welcome mat for realty stocks

Further rerating will depend on sustenance of operational outperformance, improving cash flows

The S&P BSE Realty Index has emerged as one of the top-performing sectors, yielding a remarkable 45 per cent return over the past six months. The three leading players, listed by market capitalisation, have substantially enriched investor wealth by 43-70 per cent during this period.

If the second quarter (Q2) of 2023-24 (FY24) updates from Macrotech Developers (Lodha) and Sobha, along with industry data for the quarter, serve as any indication, the trend of strong bookings for larger players is expected to continue.

The realty index led the gains among sectoral indices last Friday, gaining 3 per cent (in contrast to S&P BSE Sensex’s 0.5 per cent rise) after the Reserve Bank of India’s (RBI’s) decision to maintain status quo on rates ahead of the festival season boosted investor sentiment.

In a traditionally weak quarter, Macrotech achieved its best-ever quarterly bookings, totalling Rs 3,530 crore in Q2FY24. For the first two quarters, the company achieved sales of Rs 6,900 crore and is on track to meet its FY24 booking guidance of Rs 14,500 crore.

Despite no new launches in the first half of FY24, the company plans to introduce projects in seven new locations. With collections remaining robust at Rs 2,750 crore, Macrotech managed to reduce its debt by Rs 540 crore during the quarter, bringing it down to Rs 6,730 crore. The management has emphasised its commitment to achieving a full-year target of net debt below 1x operating cash flows or 0.5x equity, whichever is lower.

Bengaluru-based realty major Sobha also witnessed its highest sales by value in a quarter at Rs 1,724 crore, marking a 48 per cent increase over the year-ago period. Bookings reached record highs at 1.69 million square feet, reflecting a 26 per cent growth compared to the previous year.

Bengaluru recorded its highest sales by value at Rs 932 crore, accounting for over a million square feet of sales, contributing to 60 per cent of overall volumes for the company in the quarter.

Motilal Oswal Research anticipates that another Bengaluru-based developer, Prestige Estates Projects, will report its highest-ever quarterly pre-sales of Rs 5,000 crore, indicating a 41 per cent year-on-year (Y-o-Y) increase. This growth is attributed to the positive response to new launches in Bengaluru and Hyderabad. Notably, Prestige Estates Projects successfully sold a significant part of the launched inventory, amounting to Rs 3,000–3,500 crore, after launching a large project in Bengaluru (Park Grove).

The Gurugram housing market continues its strong momentum due to a shortage of inventory from Grade A developers, as reported by Antique Stock Broking.

DLF, being the dominant player, sets the benchmark in the market. Despite no significant new launches in the quarter, sales bookings are expected to be driven by ongoing projects. The brokerage anticipates sales bookings of Rs 2,000 crore (remaining flat Y-o-Y) for Q2FY24, driven solely by sustenance sales.

Real estate consultancy Knight Frank highlights that residential demand across the country trended up significantly to 82,612 units in the July-September quarter, a 12 per cent Y-o-Y growth and a 7 per cent increase from the preceding quarter. This surge in sales volumes constitutes an almost six-year high, a noteworthy feat considering the escalating prices, increased interest rates, and global challenges.

“While low-interest rates and comparatively low residential prices sparked a surge in demand in the beginning, the momentum in residential sales has sustained even as an inflationary environment forced the RBI to push up the repo rate by 250 basis points to 6.5 per cent, a level not exceeded since 2016,” it added.

Registration data for key markets like Mumbai in September also indicates an upswing in homeownership. The financial capital experienced a 24 per cent Y-o-Y growth in registrations, totalling 10,693 units. The luxury segment in Mumbai saw a significant upswing, a trend expected to persist in the medium term.
 

“Even in light of escalating prices, increased interest rates, and global challenges, consumers continue to exhibit a strong interest in owning homes. Such resilience can be attributed to rising income levels and a positive attitude towards homeownership,” say real estate research analysts Rupesh Sankhe and Tanvi Tambat of Elara Securities.

The brokerage anticipates that real estate developers in the Mumbai Metropolitan Region (MMR), including companies like Godrej Properties (with 40 per cent of its portfolio in MMR), Oberoi Realty (entirely MMR-focused), Mahindra Lifespaces (with 60 per cent of its projects in MMR), and Macrotech Developers (with a significant 90 per cent of its operations in MMR), are well-positioned to capitalise on the growth in the MMR real estate market.

While the sector’s prospects are robust, and there’s been a rally among real estate stocks, the potential for further gains from current levels is in single digits. Any further rerating depends on a strong sales trajectory, a robust project pipeline, and improving cash flows.