Realtors’ interest cost falls to multi-QTR low

This includes DLF Limited, Macrotech Developers Limited (Lodha), Godrej Properties Limited and Prestige Estates Projects Limited.

As a result, the interest expense of this sector has come down. An analysis by BOB Capital Markets Ltd showed that the interest cost of real estate companies as a percentage of sales has declined from the recent peak of 37% in the June 2020 quarter (Q1FY21) to 11% in Q3FY22.

Since real estate development is a capital-intensive business, debt reduction and low interest payments augur well for the strength of companies’ balance sheets.

“For real estate developers, debt reduction is very positive as it gives them comfort, especially on the part of lenders (banks) as they need funds for new projects. Also, reducing debt will improve your credit rating and thus reduce the cost of borrowing. Developers with better credit ratings can gain a minimum of 50 bps while raising fresh funds, and this number could be higher depending on the quantum of loan reduction,” said Abhishek Lodhia, principal analyst at Yes Securities Ltd. on a basis. The point is 0.01%.

That said, the sharp jump in real estate stocks seen last year is mostly capturing the positives.

Remember that Nifty Realty Index was the second best performing index in 2021. Strong sales, healthy cash collection and market share gains on the back of Covid-led consolidation kept the realty stocks in favour. Record low home loan rates and moderate real estate prices were among the factors that aided the sale of residential property last year.

Here, what matters for real estate stocks is whether the demand momentum seen in residential sales last year continues. The trajectory of the new launches also remains to be seen.

“Channel checks indicate that select prices have increased, and further increases may be made to offset cost inflation; The impact of these price hikes on demand is yet to be seen. Another revaluation will depend on that,” said an analyst at a domestic brokerage house, requesting anonymity. IIFL said year-on-year, compounded price growth in the listed real estate space at around 5-6% It has been modest, IIFL said in a report.