The Nifty Realty Index has substantially underperformed the Nifty 50 Index over the past one, two and five years. The difference in their point-to-point returns (Nifty Realty Index minus Nifty 50 Index) stood at -11.9%, -20.9% and -48.8% respectively in the past one, two and five years. However, recent numbers on falling inventory levels, rising pre-sales (sale before a property is built or completed) and interest rate cuts have generated hopes for the revival of the realty sector. The fullyear unaudited aggregate sales revenue of the Nifty Realty Index companies grew 23% year-on-year in 2018-19, compared to 5.8% growth in 2017-18.
According to a recent research report by J.P. Morgan, the seven-year residential down cycle that started in 2011 has ended, as is evident from the rising sales and falling debt levels of the large developers. The debt levels of listed players have gone down and their rising cash levels provide the scope for new launches. The commercial real estate sector will also help the overall sector’s growth as large developers are expected to announce major capacity expansion programmes in the near future.
Another report by Deutsche Bank states that the interest rate cycle is turning in favour of the real estate sector, and will support developers’ earnings outlook. The research house expects further interest rate cuts and maintains that lower financing cost will help boost demand and also improve developers’ profitability. After the introduction of the Real Estate Regulation and Development Act (Rera), large developers have been gaining market share. Other promising signs for the sector are also visible— 18% increase in the number of flats sold during 2018-19 in key cities compared to 2016-17.
A report by JM Financial states that the real estate sector will benefit from the affordable housing segment, which is likely to get a boost due to the return of the NDA government, which has been pushing for affordable housing. NRI interest in underconstruction properties in India has also renewed following the implementation of new real estate law— Rera.
Kotak Institutional Equities’ report says that improving sales momentum has helped cut inventory by 11% year-on-year across the country. Additionally, prices across India have also increased between March 2018 and March 2019. However, the report expressed concerns on the fall in new launches.
Brokerages are turning bullish on well-managed, listed players with rising pre-sales, business stability and those expected to deliver high earnings over the next one year. A majority of the Bloomberg analysts have given buy recommendations to the constituent stocks of the Nifty Realty Index. There are 147 recommendations on the Nifty Realty index firms and out of these 81% are buy, 11% are hold and 8% are sell. Let us look at realty stocks covered by at least five Bloomberg analysts and with substantial one-year upside potential:
Promising real estate stocks
Analysts believe that this portfolio of stocks could give 22% average return over the next one year
PE and ROE estimates for 2019-20. Current price as on 25 June 2019. Source: ACE Equity and Bloomberg.
1. Brigade Enterprises
This real estate developer has a presence across residential, office, retail, hospitality, and education segments. Brokerage firm Elara Securities believes that strong brand equity, rich launch pipeline of approximately six million square feet and stable Bengaluru market would lift the company’s residential pre-sales. Brigade’s growing annuity income portfolio, attractive valuation of its residual business and timely monetisation of the hospitalisation segment provide additional growth triggers.
2. Prestige Estate Projects
This South India-centric company’s projects cover residential, commercial, retail, leisure and hospitality segments. According to a report by investment bank J.P. Morgan, the company’s underlying operations are performing well, as is visible in its 2018-19 results— 42% growth in presales, 25% growth in rental income, and 24 million square feet of completed projects. The bank believes that Prestige’s rental business alone offers substantial upside in valuations and it expect earnings and free cash flow to turn around by end-2019-20.
3. Phoenix Mills
This company is engaged in the development of shopping and entertainment hubs across the country. Financial services company JM Financial is bullish on the stock due to its robust fundamentals and believes that commissioning of malls will drive value. It expects that malls will provide a significant advantage to the company as low competition will lead to improvement in rental income.
4. Sunteck Realty
This Mumbai-based realty company caters to the ultra-luxury and luxury residential segments. Analysts are bullish on the company because of its falling debt, healthy balance sheet, rising pre-sales momentum and declining inventory, all of which provide a cash flow visibility. Expansion of its annuity portfolio and steps to acquire new accretive land deals will be key triggers for the company in the future.
The company develops residential, commercial and retail properties. HDFC Research believes that the company is well-placed due to its strong balance sheet, robust lease momentum and residential pre-sales recovery. The brokerage house has increased DLF’s earnings per share estimates for 2019-20 and 2020-21 by 19.8% and 50.2% respectively, led by debt rationalisation.