Real estate stocks rallied on Monday. Nifty Realty index was the biggest gainer among sectoral indices, rising over 4%. The reason is simple. March quarter (Q4FY23) operational updates released by some of the leading listed realty firms over the past few days show that the sector has ended FY23 on an upbeat note.
For example, Godrej Properties Ltd on Monday said its quarterly and annual sales bookings have reached record levels. Godrej’s FY23 volumes up 40%. Last week, Sobha Ltd said it had its best ever quarterly pre-sales in the fourth quarter. Besides this, Macrotech Developers Ltd (Lodha) said it has exceeded its FY23 pre-sales guidance.
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As a result, shares of Godrej gained 9% on Monday, while those of Lodha and Sobha gained 3% each. Sobha’s update came after market hours on Thursday and Lodha’s had a market holiday due to Good Friday.
Interestingly, despite rising home loan rates, the demand for residential realty remains strong, at least for now. In fact, as Motilal Oswal Financial Services Ltd points out, real estate companies under its coverage will simply breach the FY23 (pre-sales) guidance. The brokerage estimates that on a year-on-year basis, total sales and volumes will jump around 38% and 18.5%, respectively, in Q4.
The latest move by the Reserve Bank of India to keep the repo rate unchanged has come as a boon for this interest-rate sensitive sector. Note that the affordable housing segment has borne the brunt of higher loan rates in the form of lower demand. Thus, despite a bounce on Monday, the Nifty Realty index has fallen 11% in the last one year on concerns of lack of demand due to rate hikes.
That said, companies with higher exposure to the luxury residential segment will do better in Q4. Customers in this segment are resistant to increase in interest rates. “In general, luxury residential projects should see strong sales traction due to cap on capital gains relief on new home purchases. 10 crore by April 2023,” said a Kotak Institutional Equities report. DLF Ltd, Lodha and Oberoi Realty Ltd are seen as likely beneficiaries of strong traction in luxury residential projects.
The contentious question now is on the extent of growth that lies ahead for realty firms. “With some companies recording record pre-sales in Q4 and some others breaching FY23 pre-sales guidance, commenting on the demand trajectory and launches is important to understand what will drive incremental growth from these levels, which are high -based,” said an analyst who sought anonymity.
To be sure, the ongoing sector consolidation is said to aid market share gains and pre-sale outlook for listed developers. Also, many real estate companies are on a spree to reduce debt. This means that the expected increase in the cost of borrowing should not be a concern for low leveraged companies. But, against the current backdrop, these factors may not be enough to drive a significant re-rating in real estate stocks. “We see re-rating potential in companies with growth visibility aided by continued business growth through strong cash flow potential,” said the Motilal Oswal report.
Also, with higher home loan rates, developers would not be able to hike prices substantially, which could impact the realizations and growth outlook of the sector. In addition, the slowdown in the IT sector, due to large-scale job losses, may hamper housing demand actions. Note that there is still room for another rate hike depending on the inflation data. Hence, the specter of a rate hike is not completely out of the way. Hence, a significant shift here will largely depend on how the demand and supply (inventory levels) dynamics of the sector play out.
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