Real Estate: The Rise of Phoenix

After remaining in shambles for most of the last decade, real estate has come back with a vengeance in the last one and half years.
Real Estate: The Rise of Phoenix
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The long lull in the property market seems to have ended with start of the pandemic. The NSE realty index is up by more than 215 per cent from the lows of March 2020. Even in last one year it is up by 24 per cent compared to 16 per cent by BSE 500 index. The momentum in the realty sector has surpassed many other indices. Nonetheless, if we take little, longer history, we see this index is still down by 67 per cent from its peak reached in 2008. Even the share price of companies that were trading in four digits in 2008 are trading in three digit and many shares that were trading in three digits are trading in double digit and some companies cease to exist now.

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In the same period Nifty and Nifty midcap indices, these large and midcap indexes, have increased 3.5 times and 4.5 times respectively since the start of FY08.

Since the virus outbreak, real estate players have been hit hard across the value chain. Service providers were struggling to mitigate health risks for their employees and customers. Many developers were not able to obtain required permits and were facing construction delays, stoppages, and potentially shrinking rates of return. Meanwhile, many asset owners and operators faced drastically reduced operating income, and almost all were nervous about how many tenants will struggle to make their lease payments.

Nevertheless, it seemed to be transitory and COVID-19 stood out not as a big real estate disruptor and accelerated housing demand conversion. Some of the catalysts that fuelled this include stamp duty cuts, developer discounts, high attrition and resultant hikes, democratization of ESOPs to cover a broader employee spectrum, achievement of accelerated unicorn status, and stock market rally. All-time low mortgage rates and all-time high affordability have provided the supporting environment.

Going forward also following factors will help real estate sector to maintain momentum.

Higher Affordability 

Going ahead, we believe that momentum is likely to continue. Mortgage rates offered by most large lenders are in the 6.5-7.0% range for 20-year housing loans and is the lowest ever historically since 2005. Even assuming that mortgage rates may inch up over H2FY22-23E, we believe that mortgage rates of 7.5-8.0% (assuming 100bps increase) are still affordable and would not significantly dent buying decisions.

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Consolidation in the Sector 

Going ahead, consolidation in the sector is likely to improve organised player’s position. We believe that owing to healthy balance sheets, access to capital and many unlisted, weaker developers being shunted out of the market, the market share of large organized developers is set to grow further in the next 2-3 years. Most developers in the listed space have aggressive launch plans from H2FY22 and are looking to grow at a double-digit sales value CAGR over the next 2-3 years which would likely lead to market share gains assuming that even industry size remains stagnant.

Office Leasing Recovery on the Cards 

While vacancy levels may remain flat in Q4CY21, it is expected this trend will reverse from Q1CY22E (Jan’22 onwards) with the improved pace of vaccinations across India, select corporates recalling employees to offices and gradual pick up in international travel. The Indian Commercial Real Estate (CRE) office market saw record leasing in CY19 with 42msf of annual net absorption. The office market has been in an up cycle over CY14-19 with rising rentals, falling vacancies, consolidation among developers and emergence of REITs. At the beginning of CY20 (January 2020), the outlook was bright with healthy pre-leasing for upcoming supply. However, the evolving global situation owing to the COVID-19 has led to CY20 net office absorption of 20msf  which is a 50% YoY decline. Nonetheless, as employees start returning back to office, we may see this also picking up.

Many will believe that inflation is a key risk since it may drive input cost and mortgage rates higher and derail the recovery. Nevertheless, there are reasons to believe developers have headroom to absorb inflation as greater transparency over time has reduced costs of capital and organised developers enjoy 25-30% lower funding costs than tier-2 players.

Out of many listed real estate players, in the following pages we are giving seven players that are likely to gain most out of the developments mentioned above. One can invest in any two or three players to build a strong portfolio.

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About the author: IE&M Team
IE&M Team
Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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