Whats Driving The Rally In Real Estate Stocks?
The resurgence of stock markets to all-time high levels has thrust the real estate sector into limelight, making it the most sought after talk of the town. Is the real estate cycle turning for the better? Does the sector present an opportunity for investors? In the article below Shreya Chaware provides some insight.
The real estate sector was severely hit by the first wave of the pandemic. All activities were brought to a grinding halt and labourers were forced to migrate to their hometown. As circumstances slowly improved, the economy reopened and a semblance of normalcy arrived. There was a healthy revival across the board during the January-March quarter, but the second wave of the pandemic wreaked havoc. However, it was just a speed bump as this time the real estate sector experienced a comparatively lesser impact. Agility and resilience in the face of continuous change was the mantra employed.
The exodus of labourers was better managed with developers committing to arrange their accommodation on-site. As restrictions eased in two months, all operations were up and running in no time. The BSE Realty index rose like a phoenix from the ashes and recently touched 3,343.25, recording its highest close since December 2010. The index has persistently grown by leaps and bounds over the last couple of months. Sensex furnished returns of 5.84 per cent during the last six months while the Realty index climbed 16.45 per cent, beating the benchmark by a wide margin. A similar trend can be observed over varied time horizons in the table below.
Let’s delve deeper and understand the various factors at play that are driving the rally in real estate stocks.
Government Reliefs
The reliefs offered by the government amidst the pandemic outbreak not only came to the aid of developers but also provided impetus to consumer demand. Extension on project completion timelines, loan restructuring schemes, increasing threshold for insolvency, credit infusion in the form of special liquidity facility to NBFCs and welfare fund for construction workers comforted developers on the supply side. On the consumer demand front, measures like sustained low repo rates and extension of credit-linked subsidy scheme under the Pradhan Mantri Awas Yojana (PMAY) till March 2022 have helped register sturdy revivals. Cherry on the cake was in the form of incentives like a 2-3 per cent reduction of stamp duty charges on property registration by states like Maharashtra and Karnataka.
Low Interest Rates
After a series of rate cuts by the Reserve Bank of India (RBI) since February 2021, the current repo rate stands at 4 per cent which is lower than the 4.75 per cent repo rate that was observed during the global financial crisis of 2007-08. The RBI’s decision to keep the repo rate unchanged at 4 per cent and maintain an accommodative stance in the monetary policy as long as necessary to mitigate the impact of the pandemic is working like a charm in boosting consumer demand. Over the past few months, banks have been able to pass on the benefits of low repo rates to their clients by reducing housing loan rates. Presently, housing loan rates being offered by the banks are at decadal low levels, leading to significant reduction in EMIs and implying better affordability.
Change in Consumer Preference
With work from home becoming the new normal along with restrictions on human mobility, people have mostly stayed indoors for more than 15 months. This has significantly increased the perceived value of one’s home in the broader scheme of things. It has led to a huge rise in demand by people who want to purchase a bigger and better home for genuine residential purposes and not just for the sake of making an investment. This trend is expected to continue in the coming quarters with mass vaccinations, attractive property valuations, low loan interest rates and stamp duty cuts in key markets being paramount drivers of sales growth.
Robust Pent Up Demand
The restrictions imposed amid the second wave of the pandemic coerced people to pause their decisions to buy a home. But as the economy reopened once again, pent up demand is helping the sector gain traction. As per a report by Knight and Frank, the residential segment performed remarkably well. Sales across the top eight cities grew by 185 per cent YoY in Q2 2021 and by 67 per cent YoY in H1 2021. Real estate developers concentrated on captivating potential customers by offering flexible booking amount, zero cancellation fee, free car parking or interiors, EMI waivers and various discounts such as 20:80 payment plan; which gave a fillip to sales and presales.
Private Equity Inflows
According to a report by Savills India, private equity investment inflows into the Indian real estate sector stood at `143 billion during the first half of 2021. This inflow is equivalent to 41 per cent of the investment that the sector saw in the entire year of 2020, a clear indication that despite the pandemic-induced slowdown, investors’ confidence and strong inherent demand remains unscathed. During Q2 2021, commercial office assets led the pack and were responsible for approximately 40 per cent share of the investments inflows. A renewed interest in the retail segment by private equity institutional investors was observed as the segment accounted for 33 per cent of investments.
Private Equity Inflows
According to a report by Savills India, private equity investment inflows into the Indian real estate sector stood at `143 billion during the first half of 2021. This inflow is equivalent to 41 per cent of the investment that the sector saw in the entire year of 2020, a clear indication that despite the pandemic-induced slowdown, investors’ confidence and strong inherent demand remains unscathed. During Q2 2021, commercial office assets led the pack and were responsible for approximately 40 per cent share of the investments inflows. A renewed interest in the retail segment by private equity institutional investors was observed as the segment accounted for 33 per cent of investments.
Success of REITs
In recent years, real estate investment trusts (REITs) have received a robust response in primary markets from retail and institutional investors. Brookfield India REIT IPO in February 2021 witnessed strong participation from a diverse mix of marquee investors and was oversubscribed eight times. As per JLL, the India REITs market is entering a phase of sustained growth with more listings and a broader spectrum of buyers and sellers, which will increase liquidity and incentives to securitize property assets. REIT asset acquisitions are further expected to increase in the future as a result of a clause in the Union Budget 2021-22 that allows for low-cost debt financing from international portfolio investors.
Organised Players Gaining Market Share
The market share of organised developers in housing sales in India’s top seven cities nearly quadrupled since FY17 as homebuyers increasingly trusted branded, publicly listed companies when the sector went through a rough patch post the roll out of GST and RERA. The top eight listed real estate companies accounted for 22 per cent of 93,140 units sold in 9M FY21 as compared to a mere 6 per cent share in 2.03 lakh units sold in entire FY17. Post the pandemic, unorganised players are seen losing market share in newly launched properties. Meanwhile, growing brand loyalty along with a change in customer preference is proving to be favourable for big developers, helping them acquire a bigger share of the pie.
Conclusion
The rise in sales and presales are ubiquitous across all large developers. Godrej Properties become the country’s largest listed real estate developer in terms of sales bookings in FY21 as it clocked a record pre-sales of `6,725 crore despite the pandemic. On similar lines, DLF, the country’s largest real estate developer in terms of market capitalisation, reported sales bookings of `3,084 crore in FY21, a mega 24 per cent YoY growth. The pandemic has distinctly accelerated consolidation of market share among the top developers. Large developers are able to borrow funds at relatively cheaper rates when compared to smaller developers in the unorganised sector. Majority of the listed players aim to significantly reduce debt in the coming years. Hence, with lower debt on books and rising sales, companies could enjoy significant operating leverage over the coming years.
Recommendations
Delhi Land and Finance (DLF)
CMP (Rs ): 331.65
BSE CODE: 532868
Face Value(Rs ) : 2
52 Wk High/Low : 359.10 / 140.40
Mcap Full ( Rs Cr.) : 82,093.71
HERE IS WHY
✓ Diversified portfolio
✓ Healthy demand momentum
✓ Sustained quarterly performance
Founded in 1946, DLF started with the creation of 22 urban colonies in Delhi. In 1985, the company expanded into the then unknown region of Gurugram, creating exceptional living and working spaces for the new Indian global professionals. Today, DLF is the largest publicly listed real estate company in India with residential, commercial and retail properties in 15 states and 24 cities. The company’s diverse verticals reflect its dedication to developing ecosystems for India’s changing needs. But its foundation has always been employees, customers, stakeholders and shareholders.
DLF is primarily engaged in the business of development and sale of residential properties (the ‘development business’) and the development and leasing of commercial and retail properties (the ‘annuity business’). The company focuses on spearheading innovation through empowerment and optimism in order to build the foundation of India’s future on the legacy of the past. It holds 75+ years of experience in real estate development and has developed over 150 real estate projects. Area-wise, the company has developed more than 330 million sq. feet.
Financial Overview
The company has recently declared its quarterly results for the first quarter of FY22. Its business has delivered sustained performance despite a challenging period and it remains confident of delivering its business goals. Its consolidated revenue stood at Rs 1,243 crore, reflecting a YoY increase of 92 per cent. Its EBITDA stood at Rs 498 crore, reflecting robust YoY growth of 400 per cent. The net profit for the quarter was recorded at Rs 339 crore, erasing the losses incurred in Q1FY21. The Board of Directors of the company recommended a dividend of Rs 2 per share.
On an annual basis, the net sales and operating income were down by 10.99 per cent whereas operating profit improved by a mere 0.43 per cent in FY21 as compared to FY20. The net loss of Rs 1,479.20 crore recorded in FY20 turned positive with the net profit of Rs 477.30 crore in FY21. The company experienced an encouraging demand in the residential business. Since the pandemic, the inherent demand for homes has gone up; people have now realised that home is the safest place and is an important asset class.
Reacting to this sentiment, new sales bookings exhibited sustained performance sequentially and stood at Rs 1,014 crore, reflecting a YoY growth of 567 per cent. The company launched ‘Independent Floors’ across Gurugram and has bagged new product sales’ booking of Rs 542 crore during the quarter. There was a surplus cash generation of Rs 141 crore during the quarter. Continued focus on improving collections and tight cost control measures have contributed to surplus cash generation. The net debt stood at Rs 4,745 crore.
Rationale
The company is excited about the growing demand in the residential markets and expects this growth cycle to continue in the long run. With this strong outlook and all the fundamental drivers supporting the residential segment, it continues to focus on bringing new product offerings across segments and geographies. The launch of Independent Floors across Gurugram continues to attract an enthusiastic response from the market and portrays healthy absorption trends. With all the retail malls now operational but with a few restrictions, faster recovery is expected with further stabilising of the economy. Hence, owing to the healthy demand momentum and DLF being comfortably poised to scale up its business, we recommend BUY for this stock.
Brigade Enterprises
CMP (Rs ):323.25
BSE CODE: 532929
Face Value(Rs ) : 10
52 Wk High/Low : 357.35 / 144
Mcap Full ( Rs Cr.) : 7,422.34
HERE IS WHY
✓ Improved Credit Rating
✓ Increased Cash Generation
✓ Strong recovery in residential segment
The Brigade Group is one of India’s leading property developers with over three decades of expertise in building positive experiences for all stakeholders. Instituted in 1986, the company has developed many landmark buildings and transformed the skyline of cities across South India, namely, Bengaluru, Mysuru, Mangaluru, Hyderabad, Chennai and Kochi with developments across the residential, commercial, retail, hospitality and education sectors. Since its inception, Brigade Group has completed 250+ buildings amounting to over 70 million sq. feet of developed space across a diverse real estate portfolio.
Brigade Enterprises assures best-in-class design and top-of-theline facilities that exude elegance and sophistication. The residential developments include villas, villaments, penthouses, premium residences, luxury apartments, value homes, urban studios, independent living for seniors and mixed-use lifestyle enclaves and townships. Over the years, the projects have been one-of-a-kind in the sector. For example, it developed Brigade Gateway, Bengaluru’s first lifestyle enclave and Brigade Exotica, one of the tallest residential buildings in Bengaluru. Brigade Enterprises is among the few developers that also enjoys the reputation of developing Grade A commercial properties.
Financial Overview
The company reported net sales and operating income of Rs 382.79 crore in Q1FY22 as against Rs 203.33 crore reported in Q1FY21, zooming by 88.26 per cent. The operating profit for the quarter proliferated by a robust 107.27 per cent from Rs 57.89 crore in Q1FY21 to Rs 119.99 crore in Q1FY22. Meanwhile, the net profit for the quarter had a different story to tell. The company incurred a net loss of Rs 86.92 crore which is higher than the net loss incurred in Q1FY21 of Rs 64.90 crore. On an annual basis, the net sales and operating income were down by 25.92 per cent whereas operating profit plunged by 25.3 per cent in FY21 as compared to FY20. The net profit of Rs 112.4 crore recorded in FY20 turned into a net loss of Rs 98.98 crore in FY21.
As for the segment-wise performance of the company, on a sale basis, real estate achieved sales value of Rs 480 crore during Q1FY22, a 92 per cent increase from Rs 249.9 crore in Q1FY21. Sales volume was approximately 0.76 million sq. feet in Q1 FY22, an 82 per cent increase from 0.42 million sq. feet in Q1FY21. The lease rentals segment recorded office rental collection of 99 per cent and the outlook on this segment remains positive. A new leasing project of 1 lakh sq. feet was completed in Q1FY22. In the hospitality segment, the occupancies remained subdued and stood at 23 per cent in Q1FY22 as compared to 11 per cent in Q1FY21. An uptick was witnessed in July 2021 but long-term recovery will depend on corporate and international travel.
Rationale
During the recent quarter, the company has raised Rs 500 crore through qualified institutional placement (QIP) and the issue was oversubscribed by 6.25x. The proceeds from this QIP will be used for acquisition of land or land developmental rights, investing in subsidiaries and associates, working capital requirements, repayment of debt and general corporate purposes. A bolt in the blue was that ICRA upgraded the company’s credit rating to A+ Stable from A Stable, which indicates lender and investor confidence in the company.
Overall cash generation and debt reduction in the residential segment in FY21 were backed by a strong recovery in the residential segment while there will be a gradual commercial leasing pickup going forward. The further full reopening of the economy is likely to cheer the retail and hospitality segment from H2FY22 with operations normalised to the pre-pandemic levels. Additionally, Brigade Enterprises has comfortable debt equity and sufficient liquidity from operational commercial assets. Hence, we recommend BUY for this stock.
(Closing price as of Aug 11, 2021)