Shares of Indian real estate companies are attracting a lot of attention from foreign institutional investors (FIIs). In fact, absolute equity holdings of FIIs in real estate stocks as on 15 September was the highest so far in 2023, showed the data compiled by Yes Securities.
True, home loans are dearer now following the Reserve Bank of India’s (RBI) spree of interest rate hikes. Indeed, this has dented affordable housing sales as the purchasing power of potential buyers of this segment took a hit post the covid-19 pandemic. Also, these buyers tend to be most sensitive to interest rate hikes.
But the K-shaped recovery playing out in the real estate sector has meant higher home loan rates have not deterred buyers in the premium and luxury housing segments where pre-sales or bookings have been on solid ground. A recent real estate consumer sentiment survey from Anarock Property Consultants said demand for residential mid and premium properties (priced over ₹45 lakh) is at an “unprecedented high” for the first six months of 2023 in the top seven Indian cities.
These trends have augured well for key listed realty companies that have a far bigger presence in the premium and luxury segments than in affordable housing. Going ahead, new launches are expected to be skewed towards the premium segment rather than affordable. Significant launches are slated to happen in key markets in the December quarter (Q3FY24). “Pre-sales performance of listed real estate companies in H2FY24 is expected to be stronger than H1FY24, with a major chunk of targeted FY24 pre-sales expected to happen in H2,” said Parikshit Kandpal, vice president, institutional research, HDFC Securities.While real estate sales have been resilient so far, bouts of profit-taking in realty stocks could be on the anvil. The Nifty Realty index has rallied by 31% in 2023 till now, beating the Nifty 50 index by a wide margin.
Moreover, elevated inflation is feared to keep interest rates higher for a longer time, which may push potential buyers to delay their home purchases. That apart, in the upcoming Q2FY24 results, the trajectory of operating cash flows, debt levels and investments in land banks would be among the crucial company-specific monitorables. According to IIFL Securities, on an aggregate basis for realty companies under its coverage, aggressive investments by developers in business development led to net debt rising by 7% year-on-year in Q1FY24. Further, borrowing costs also rose sharply, said IIFL. Hereon, a further re-rating of realty stocks hinges on the pace of new launches, sustenance of pre-sales momentum and improvement in profitability.
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Updated: 21 Sep 2023, 10:54 PM IST