Realty check: Avoid buying commercial real estate stocks, caution analysts

Even as demand for commercial real estate is on an uptrend, analysts have turned cautious on related stocks on valuation concerns.  While the stock prices, they say, are pricing-in most of the positives, likely over-supply ahead has not been factored in.

“The commercial real estate shares are richly valued at present, with many of them already discounting FY26 earnings. Investors should not be in a hurry to take new positions unless there is deep value visible in the counters," said Deven Choksey, MD, DRChoksey FinServ.

The rental portfolio accounts for 45-100 per cent of the overall portfolio for real estate players such as DLF, Embassy REIT, and Mindspace Business Parks REIT. However, for players like Brigade Enterprises and Oberoi Realty it contributes around 20 per cent and 18 per cent, respectively.

 

On the bourses, shares of Prestige Estates, Oberoi Realty, Brigade Enterprises, DLF, Embassy REIT, and Mindspace Business Parks REIT, have surged in the range of 11 to 214 per cent over the past one year. By comparison, the Nifty50 and Nifty Realty index have grown by 25.5 and 109.8 per cent, respectively. 

Given the sharp run-up, Deepak Jasani, head of retail research at HDFC Securities, too, said investors should resist buying at current levels as stocks offer no major upside.

"There is nothing much left to look forward to. Investors can, partially, book profit despite the past month's correction,” Jasani said.

Valuation-wise, Nifty Realty is currently trading at a price to earnings multiple of 68.1 times, which is higher than its 2-years average of 50.71 times.

Individually, Brigade Enterprises was at 72.4 times, Prestige Estates at 50.2 times, Oberoi Realty at 34.6 times, DLF at 76.6 times, Embassy REIT at 36.4 times, and Mindspace Business Parks REIT was trading at 37.1 times.

Demand-Supply mismatch

Indian commercial real estate developers enjoyed high demand in the first half of calendar year 2024 (H1 CY24), as office space leases grew by leaps amid supply constraint.

According to a report by Nuvama Institutional Equities, the demand of office spaces expanded by 46 per cent year-on-year (Y-o-Y) at 20.5 million square feet (msf) in H1 CY24, while supply rose 19 per cent Y-o-Y to 20.1 million square foot.

More recently, in the second quarter of calendar year 2024 (Q2 CY24), office space leasing went up by 54 per cent Y-o-Y and eclipsed supply, which was down 33 per cent Y-o-Y.

Analysts believe that except Hyderabad, major micro markets are witnessing higher demand than supply due to demand coming from Global Capability Centres (GCCs) and corporate houses. Besides, project launches have been delayed by developers in major markets since Covid-19.

"Generally A-Grade IT park construction takes three to four years for construction. Most of the developers resumed their launches in FY22 onwards. Hence this situation of excessive demand will be there for the next two-to-three years. But, beyond that, demand and supply will balance out,” said Vijay Agrawal, managing director-investment banking, Equirus.

That said, analysts project high supply hitting the market by CY26.  The top-seven cities, Nuvama said, could witness around 164 msf of supply over Q2CY24–26, leading to completions exceeding 50 msf annually -- much higher than the peak demand

witnessed in any year.

"We believe supply shall outstrip demand as the leasing trajectory is likely to be lower than completions in the medium-term. With the gap between demand and supply falling, we expect vacancy levels to decline marginally," the brokerage said.

Nonetheless, the brokerage has assigned 'Buy' ratings to Prestige Estates, Brigade Enterprises, DLF, and Embassy REIT as consolidation in the office space segment could favour financially strong developers, helping them gain market share.