Real estate stocks are back on investors’ radar thanks to institutional and retail money pouring into the sector, which could turn out to be the Dark Horse of 2021, experts suggest.
The Nifty Realty Index, comprising of 10 real estate companies listed on the National Stock Exchange of India, hit a 10-year high (intraday) on Tuesday, putting the stocks in the spotlight after close to a decade of underperformance.
The factors that contributed to the stellar rise in realty stocks include work from home amid COVID-19, which pushed many families to buy big houses, low interest rates, lower stamp duty in some states, reduction of debt by companies, increase in demand for both commercial and retail property, and institutional investments.
“On July 13, 2021, the realty index reached an intra-day high of 386.85 points, its highest level since December 2010. With several companies providing work-from-home options or mandates, families are rushing to purchase larger homes to improve the comfort of their working environment,” said Gaurav Garg, head of research at CapitalVia Global Research Ltd. “Furthermore, the central bank’s significant interest rate cuts over the last two years, combined with efforts like stamp duty reductions in locations like Mumbai, have boosted demand.”
Amid the gains in the realty index, seven real estate stocks are still 10 percent to 80 percent lower than their all-time highs, indicating that they have the potential to advance – Indiabulls Real Estate, DLF, Sobha, Mahindra Lifespace, Sunteck Realty, Prestige Estates and Phoenix Mills.
Since the end of the real estate boom in India, which coincided with the global financial crisis in 2008, developers have been saddled with large amounts of debt, delayed construction activities, and tightened liquidity conditions, among others, resulting in substantial inventory on their hands, experts said.
“After spending close to a decade in limbo, the real estate sector is back with a bang and the COVID-induced lockdowns just showed how necessary it was to have a place as their ‘own home,’” said Gopal V Kavalireddi, head of research at FYERS. “With the regulatory environment turning favourable due to RERA (Real Estate (Regulation and Development) Act) and the Model Tenancy Act, coupled with the lowest home loan interest rates in years and a reduction in stamp duty by certain states, homebuyers have been lining up to get their own property.”
With homes becoming central to working and studying, buyers were more inclined to upgrade to larger apartments.
What do the technical charts say?
In the past 10 years, the Nifty 50 Index delivered returns of 183 percent, while the Nifty Realty Index returned a meagre 34 percent, which leaves room for a lot of up-moves.
It is only now that the realty index has started performing, with a one-year return of 88 percent compared with the Nifty 50’s return of 46 percent. Over the past three months, the Nifty Realty Index advanced 20.6 percent while the Nifty 50 rose 9 percent.
“This outperformance coincides with the improvement in business fundamentals and financials of real estate stocks. The realty index shows a breakout on the monthly charts and this calls for fresh investments at this point too,” said Kavalireddi of FYERS. “Barring the possibility of a third COVID wave impacting construction work and hampering economic activity, real estate stocks can continue their run-up, compensating for their poor performance over the past decade.”
Institutional Money
The realty sector was one of the top performers as institutional investors deployed over $ 1.35 billion into the Indian real estate market, led by the commercial property segment, during the quarter ended June, representing a nine-fold on-year increase, JLL said in a report.
“Warren Buffett’s global residential real estate brokerage has also forayed into the Indian property market this week, which helped to lift sentiments further. FPIs still continue their investment flows in realty stocks despite the decline witnessed on final sessions of the week,” said Sacchitanand Uttekar, DVP – technical (equity), at Tradebulls Securities. “India is at the start of a new housing cycle after a seven-year downturn as global head of equities at Jefferies, Chris Wood, also allocated 17 percent of newly launched Indian portfolio to real estate.”
Dark Horse?
If there are no further lockdowns, the real estate sector could turn out to be a Dark Horse.
India’s realty outlook is stronger than it was a year ago, although the trend may continue to be volatile, at least until the pandemic is over. But since the trend remains strong and smart money seems to be moving towards the unlock plays, real estate may continue to be an outperformer.
“As the saying goes ‘trend is your friend,’ and currently, the trend is in favour of the realty segment. Sector rotation of Nifty indices has been in vogue over the last 15 months, with metals outperforming most indices,” said Kavalireddi.
“Currently, realty, textiles and old economy industrials are gaining traction due to better valuations, amply supported by winds of change. There is a very good possibility that these sectors could deliver outsized and fast-paced returns for the year.”
Kavalireddi added that investors should look at their risk propensity, news flows and ground level activities in the economy before and after investing in these sectors. Realty might well be the Dark Horse of 2021, erasing a decade of underperformance.
