By Maitreyi Karn
In India, the real estate sector employs the second highest share of people, after agriculture. With increasing urbanisation, it has become a major driver of India’s economic growth, with many young families looking to buy a home both to live in and as a durable investment. Commercial real estate has also soared. By 2025, the sector is expected to contribute nearly 13% to GDP growth, according to a report from IBEF.
This sector’s growth is dependent on how the economy is doing, the savings rate among households and interest rates offered by banks. While India is well poised to face global headwinds, growth momentum has slowed since the start of 2022.
From April 2022 till date, RBI has raised rates by 225 bps. The repo rate stands at 6.25% as on January 6, 2023. Although this shift has been rewarding for banks, rising rates affect housing demand and pose a threat to real estate sector growth.
Surprisingly however, demand has remained intact. But DLF’s management says that rate hikes could affect consumer sentiments in the upcoming quarters. A sector report from Motilal Oswal suggests that demand will continue to remain strong for another 75-100 bps rate hike. However, high-interest rates also make construction and raising capital more expensive for real estate companies, squeezing them both on the demand and production side.
Pre-sales improve in a seasonally weak quarter
Q2 is generally considered a slow quarter for real estate companies, given the monsoon season and ‘shradh’ or ‘pitru paksha’ period when Indian consumers avoid making new purchases. However, in a remarkable turnaround, real estate companies recorded an increase in their pre-sales this time around, both QoQ and YoY. Dolat Capital’s sector report suggests that cumulative pre-sales for listed players improved by 4% QoQ in Q2FY23.
DLF’s pre-sales have grown marginally by 0.6% QoQ because of the company exhausting its major pipeline in the luxury segment. However, the company plans to launch new projects worth Rs 19,000 crore over the next 18 months and its benefits will be reaped in FY23 and FY24.
In the past week, Macrotech Developers (Lodha) and Sobha released their operational updates for Q3FY23 as well. Sobha had strong numbers, with pre-sales rising 22.4% QoQ but Lodha’s fell 3.6% QoQ in Q3.
Investors seem enthused about DLF’s growth, as it has outperformed both the Nifty 50 and Nifty Realty index in the past six months.
Macrotech Developers (Lodha), Oberoi Realty and Sobha have also seen a significant rise in pre-sales bookings in Q2FY23. However, Lodha group’s stock has not risen much in response, as it reported a net loss of Rs 933 crore in Q2FY23. This was because of a one-time non-cash provision of Rs 1,177 crore made by the company for its UK investment.
Oberoi Realty’s new product launches will show up in Q3 numbers as the festive season drives growth. Sobha also expects sales momentum to continue with new launches in the South markets. It expects pre-sales to reach 30-35 lakh square feet in H2FY23. Currently, the sales momentum has been in the range of 13 lakh square feet. Motilal Oswal has taken a positive stance on realty stocks, as a strong performance in H1 gives hopes for an even better performance in H2.
Momentum missing in realty stocks’ share prices
Rising interest rates, recession fears and Covid scare due to reopening of the Chinese economy have brought back a certain level of uncertainty among investors. Despite having a strong Trendlyne Durability score, realty stocks lag in valuation and momentum.
These stocks reported a fall in revenue in Q2FY23 as pre-sales numbers were low in FY22 and Q1FY23, reflecting into Q2. However, now that pre-sales bookings have increased, revenue growth should reflect well in H2FY23 and FY24. Stock momentum (bullish or bearish nature of the stock) would depend on both the local and global economy and overall sector performance.
Realty companies reported a fall in debt in Q2FY23, except for Oberoi Realty. DLF’s debt levels fell the most by 46.2% YoY to Rs 2,142 crore. Next in line is Sobha with a 32% fall in net debt to Rs 1,888 crore.
Macrotech Developers has also seen a debt reduction of 29.5% YoY to Rs 8,795 crore, but what’s even better is that the company has paid off $225 million bonds for its investments in London, ahead of its schedule, and is now free from any further obligations. Oberoi Realty saw a 31% YoY increase in debt to Rs 2,100 crore.
On November 24, 2022, Oberoi Realty fell nearly 2.3% after it announced a 50% buyout in the Worli project for Rs 4,000 crore. Investors were worried this would shoot up the company’s debt levels. However, the company issued a clarification saying that it’ll be a cash-neutral transaction.
Interest rate hikes may slow down in 2023, but investors want more incentives to invest
Although real estate companies have come a long way since the lockdowns, the ride has not been smooth. This calendar year brought pressures of high input costs, rising inflation, and higher interest rates; affecting consumer affordability. Reports suggest that affordability has fallen 2% across markets and the EMI load is up 7.4%. Affordability index is the ratio of EMI paid on loans and income.
State Bank of India’s historical data suggests that home loan rates have been in single digits for the past five years. In January 2020, home loan rates fell below 8% for the first time in 15 years, according to reports. If the pace of rate hikes does not reduce, home loan rates might inch towards double-digits.
However, rate hikes are likely to slow down in 2023. Abhishek Lodha, MD & CEO of Macrotech Developers, says, “We think that RBI is approaching the end of its interest-raising cycle and might increase another 50 basis points or so.”
Other risks involve a likely recession in the US and an increase in attrition in the IT sector dampening the absorption rate. Though the rate hikes have not affected the absorption rate much, a weaker global economy could play havoc, causing delayed purchases and a fall in income levels.
On the bright side, Q2FY23 saw an increase in absorption rates in high-yielding markets like Gurgaon, Bangalore and Noida. Gurgaon saw the highest absorption rate across residential, luxury and even mid-income segments, followed by Bengaluru and Mumbai. Gurgaon’s absorption rate grew 64% QoQ in Q2 for just Tier-1 cities. Although companies are hesitant to raise their guidance for FY23, Trendlyne’s Forecaster estimates a revenue increase of minimum 10% for DLF, Lodha (Macrotech Developers), Oberoi Realty and Sobha.
Compared to the forecaster numbers, most companies have already achieved nearly 50% of their FY23 target in H1FY23 and will need to conquer the other half in H2FY23. With an increase in supply, sufficient price hikes and new launches lined up, H2 looks bright for realty companies.
Commodity prices have cooled down, easing the way for better revenue earnings. However, there needs to be a further decrease in inventory overhang (time taken to sell the current listings in an area) to avoid a drop in margins. And hopefully, new covid strains will not play spoilsport with the realty sector, which analysts have high hopes for.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.