Realty Sector Back In Focus
Several major real estate players are talking about strong revival in demand, be it affordable housing or luxury housing projects. With demand revival in place and interest rates at all time low - will real estate stocks outperform? Geyatee Deshpande has answers to the questions related to the real estate stocks.
As was the case with most sectors, the realty sector too faced the brunt of the pandemic and its subsequent lockdowns. Unfortunately, the pandemic hit businesses at a time when the economy was growing at a positive pace for the future. As constructions and projects in the realty sector halted, the future demand of new realty projects remained uncertain. Meanwhile, in spite of a decline in demand for leisure and office spaces, post easing of the lockdown a higher demand or, as some say, a pent-up demand in the sector was seen, which along with some positive financial factors in the economy led to strong rallies being witnessed in realty stocks.
Though investors continue to remain optimistic about the future, there are some, as for example, Ashwin Shah, who says, “Investors believed that increase in demand for work spaces, individual housing and investments in the realty sector had the sector doing comparatively well during the pre-pandemic times. But now after the pandemic, what we are seeing could be the result of the pent-up demand and realisation or completion of projects, further to which, going forward, a hollow will be created if the demand growth in the sector doesn’t boost up soon enough.”
From such viewpoints we can definitely conclude that investors are baffled if the current increase in realty demand as well as the rally in realty stocks would remain sustainable in the future. It cannot be said that worries of such investors are wrong; neither are they entirely right. Table 1 below lists 10 companies according to highest net sales for Q2FY21. Comparing the net sales of Q2FY21 with that of Q1FY21, it can be seen that there is a substantial increase in net sales post easing of the lockdown. As labour availability increased companies were able to undertake projects with full capacity and efficiency, leading to improved realisations. During Q2FY21, companies such as Prestige Estate Projects, Sobha Ltd., Oberoi Realty, NBCC, etc. reported substantial increase in their net profits compared to Q1FY21.
For the same set of companies, Table 2 compares their net sales of Q2FY21 with that of the December ended quarter of FY20, further highlighting de-growth in net sales or simply to state that though recently there has been an increase in sales in the realty sector, it is yet to cross the pre-pandemic levels.
On a YoY basis too, the net sales and net profit of realty companies have seen a negative impact as the calendar year 2020 compared to 2019 is an exceptional year troubled by the extensive impacts of the pandemic. Taking this grim scenario into account and to boost the sector as well improve demand in the realty sector, the government announced some financial reliefs. Finance Minister Nirmala Sitharaman outlined relaxations in Income Tax rules to allow sale of primary residential units of up to Rs 2 crore value below the circle rate. Till now, only 10 per cent difference between the circle rate and the agreement value was allowed.
Relief Packages
To uplift the residential real estate sector, the finance minister said that the differential has now been increased to 20 per cent for the period up to June 30, 2021, for only primary sale of residential units of value up to Rs 2 crore. This measure is expected to reduce hardships faced by both home buyers and developers and help in clearing the unsold inventory. As of end of September 2020, developers had a locked-in capital of nearly Rs 3.7 trillion with unsold inventory to the tune of more than 4,50,000 units at various stages of construction across the top seven cities. With the government’s booster dose, developers hope to continue to see a reduction in unsold inventory with increasing sales levels.
Since the realty sector was seen struggling with unsold inventory of unsold housing units in major cities, the central government had written to states to reduce stamp duty on registration of properties. Maharashtra and Karnataka did so with immediate effect on transaction of immovable property to boost sales and attract more buyers, which in its preliminary stages has seen a good response with increasing number of registrations. Union Housing and Urban Affairs Minister Hardeep Singh Puri had previously mentioned that the sale registration in Maharashtra for September 2020 surpassed the registrations done in pre-pandemic era and recorded the highest registrations of this calendar year i.e. of 1,19,834, with factors such as reduction in stamp duty by the state government and various other steps of the central government contributing to the increase.
Further, Income Tax relief for developers and home buyers will encourage transactions and attract first time homebuyers. As a relief to contractors in the construction and infrastructure sectors, performance security deposit has been reduced to 3 per cent till December 31, 2021, for projects without any dispute. The government provided an additional outlay of Rs 10,000 crore for MGNREGS or the Pradhan Mantri Garib Kalyan Rozgar Yojana in FY21 as well. Recognition of real estate as one of the important sectors in the country vital for the economy’s growth is very essential as it has strong influence in creating ancillary industry demand and employment, boosting housing demand in the country.
The New Normal
Sentiments have changed for the realty space and this will be of benefit for infrastructure developers as well suppliers. Capital expansion and demand rebound post-pandemic can also be seen. The government’s spending on ‘smart city’ projects is also picking up pace from which the realty players are expected to receive a positive spin-off through more orders and execution in the coming few years. Even for the cement sector in India, demand was pretty strong even in the weak monsoon season and the period thereafter while prices have remained pretty stable. The prices are now picking up with volume growth.
During the lockdown period, many shifted to a work-from-home style of working and continue to do so. This having become the new normal, many companies are now shifting to smaller work spaces. This transition is helping in reviving the real estate economy which had come to a standstill in the previous months. Companies seem to be deciding to move to city outskirts where rents are less, which will further boost the market in those areas. According to real estate experts, there is a rise in prices by around 6-8 per cent depending on areas in Mumbai and by around 7-15 per cent depending on areas in Bangalore, which can be considered as a promising sign for the sector.
Considering examples of companies based in Mumbai’s Central Business District (CBD), some companies are moving out, no more focusing on new buildings or high-rises but instead on smaller spaces with old style construction. The main reason for this is the reduction in the number of employees. Customers are also looking at creating office-like spaces at home allowing them to hold conferences and meetings. Though several leasing deals on final stages of negotiations were deferred, post easing of lockdown restrictions the deals witnessed growing momentum. Bigger companies or multinationals with long-term investment plans in India have been on an office-leasing spree to get new bigger offices which can enable them to fulfill their long-term goals as well create a strong footprint in India.
These bigger office spaces will allow the companies to adhere to the rules and regulations of maintaining social distancing and safe office environments. Now, office spaces are required to be redesigned keeping the safety of the employees as a priority and to follow the new social distance norms. Taking such factors into account, we are likely to witness restructuring, dedensification, and transformation in the upcoming commercial market scenario. These adjustments will lead to demand for larger floor plates and will drive further demand for commercial RE – hence boosting the overall outlook for the sector. And though work-from-home is the preferred setting, many believe that adjustments made to cramped up offices spaces will help in boosting employees’ ‘back to office’ sentiments. Though there is growing demand in the sector, the real estate cost has also increased as the input cost has inched up, especially that of steel and cement. Additionally, new projects will also be taking some time to be handed over to customers as deadlines have been pushed ahead due to the lockdowns. With the rising digital economy, the demand has shifted to areas such as warehousing, logistics, data centres, etc.
"The pent-up demand is essentially organic"
Anuj Puri, Chairman, ANAROCK Property Consultants
Going forward which area in the realty sector may witness sustained demand growth – individual housing, office spaces or any other area? The main theme of 2020 has been about being accommodative, collaborative and understanding, not just in real estate but across sectors and industries. As for office space, the main efforts of developers this year have been to retain their old tenants rather than getting new ones. Rentals in office space in 2020 will more or less remain stable (neither increase nor decrease) because developers wouldn’t want the market benchmark to change. Instead, they are willing to offer discounts such as rent deferrals, camp discounts or rental waivers (for 2-3 months as the case may be) so that the overall rental outgo of their tenants is reduced, and they get some relief.
As for 2021, the office leasing activity will fare better in comparison to 2020. Continued work-from-home culture will get compensated by the de-densification of office space and thus we may see renewals happening. However, in terms of new lease, players in the under-construction office real estate space will have to keep their rentals at a competitive price in order to attract tenants. Furthermore, despite unusual pressures on the housing market, residential real estate is on a high this festive season.
As anticipated, the ongoing festive quarter (October to December period) is seeing robust housing sales across the top cities. This is largely due to multiple offers and discounts being doled out by developers all across and limited-period stamp duty cuts in states such as Maharashtra. These discounts and offers collectively give buyers overall financial benefit from 5-15 per cent of the property cost depending on project, amenities, etc.
Additionally, lower home loan interest rates are also attracting buyers. Latest data also signals positive trends. ANAROCK Property Consultants sold 1,805 homes across top nine Indian cities (NCR, MMR, Chennai, Kolkata, Bangalore, Pune, Hyderabad, Ahmedabad and Lucknow) and Dubai in the months of September and October this year. Last year, the firm sold 1,016 units in the corresponding period.
According to you, is the current increase a result of the pent-up demand? This pent-up demand is essentially organic and driven by the desire to own homes further accelerated by these schemes and offers. Further, developers will continue to fuel demand with offers and schemes even beyond the festive season. Likewise, home loan interest rates will not harden anytime soon given that increase in rates would impact overall demand at a time when the government is keen to boost consumption.
What is the long-term outlook for the realty sector? At the industry-level, ANAROCK research expects the top seven cities to altogether see up to 35 per cent jump in housing sales in the ongoing festive quarter (October to December) against the July to September period (Q3 2020) on the back of above-mentioned reasons. If it is so, then housing sales in entire CY2020 will have rebounded to more than 50 per cent of the overall sales clocked in CY2019 – approximately 2,61,500 units were sold in 2019 across the top seven cities. This is significantly higher than our previous predictions.
India is expected to see at least 28 large hyper-scale data centres constructed over the next three years, spanning over more than 16 million sq. feet with at least a minimum of 1,400 MW of IT power capacity, thus equalling to nearly 0.6 million sq. feet and 50 MW per facility on an average per hyper-scale data centre. The Indian data centre industry has attracted around USD 977 million of PE and strategic investments since 2008 and out of that approximately 40 per cent, which is nearly USD 396 million, were from January 2020 to September 2020.
Analysts believe that every sector witnesses such shifts in demand of products and those players which have diversified product portfolios and have the risk appetite to shift their approach to cater according to the industry’s needs would be able to sustain in the longer run. Along with the positive indicators in the sector, the measures announced by the government surely did push the realty stocks higher along with other positive shifts in the sector. A comparison between the Sensex and BSE Realty index in Table 3 clearly indicates that the realty index outperformed Sensex, gaining by 3.99 per cent in a week. In a month’s time the Sensex rose by 8.95 per cent while the realty index jumped by 14.17 per cent on optimistic future growth.
Thus, investors seem to have a renewed interest in the sector believing that the realty sector is growing at a good and sustainable pace and is quite attractive for the future. Data available on the bourses showed that ace investor Rakesh Jhunjhunwala had bought stocks of Indiabulls Real Estate through a bulk deal, encouraging many to pin hopes on this sector.
The index constituents of BSE Realty index, highlighted in Table 4, gained 15.14 per cent on an average in the last one month while their performance in a year’s time remained subdued. In the last one month, companies such as Indiabulls Real Estate, Brigade Enterprise and Phoenix Mills topped the rally chart, thus attracting more investors. But while the stocks have posted a good rally in the last one month due to the various incentives offered by the government, there still is a big hill to climb in order to cross the pre-pandemic levels. In a time period of one year, Brigade Enterprises is the only company amongst the index constituents to have performed well, giving a sustainable return of 11.63 per cent.
The above table shows a comparison of historical performance of realty stocks. Majority of the realty stocks that witnessed a sharp rally in recent times are small-caps.
Conclusion
To provide an overview, it can be deduced that though currently uncertainty looms large over the realty sector, the sector is always a beneficiary of economic development. People will continue to buy homes and offices and there will always be a need for infrastructure. Hence, the demand in the realty sector will continue to increase but with a shift in certain demand areas. Government reliefs and policy boosts have also been pushing up demand for the housing and realty sector. With the step to reduce the stamp duty seeing a positive response, industry experts believe that a further reduction in premium on things such as extra FSI could also boost the realty sector very well.
Additionally, the listing of India’s first two REITS have been successful in garnering investors’ interest globally. To sum up, keeping in mind the long-term goals for investment, investors looking for investing in realty stocks should definitely watch out for realty companies with dominant brand image, sustainable cash flows, promising order book and ethically strong business values. Whereas those investors who have a risk appetite can jump in and take advantage of rumours and news-based rallies in small-cap and mid-cap realty stocks but should remember to wisely exit at the right time. Growing demand in the sector and various relief initiatives should help the rallies in the sector sustain the momentum.