After having been beaten down for a long spell, real estate stocks are roaring on Dalal Street this year like there will be no tomorrow.
On a year-to-date basis, the Nifty Realty index has already surged 37 per cent with Delta Corp surging nearly 85 per cent, followed by Sobha (up 62.83 per cent), Unitech (up 46 per cent) and Godrej Properties (up 44 per cent).
Other realty majors such as DLF, Prestige Estates, Oberoi Realty and Indiabulls Real Estate have also surged between 25 % and 35 % during January 1 to April 5 this year.
With the government clearing the final hurdle for GST implementation, which is expected to be a shot in the arm for the realty sector, and the Reserve Bank of India allowing banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), the outlook for the realty counter has improved further.
But how much can these stocks rise really? With the demand situation still bleak, what’s really driving these stocks?
Analysts on Dalal Street cite these five reasons for the latest bout of spike in real estate stocks.
Government push: The Centre as well as the states have taken several initiatives to push revival of the realty sector. The Smart City Project with a plan to build 100 smart cities is a prime opportunity for the real estate firms. Market experts believe game-changing events such as RERA and GST also augur well for the sector.
“The government thrust on low-cost housing, infrastructure status to affordable housing and high growth visibility have mainly improved sentiments,” said Ajay Jaiswal, President – Strategies & Head of Research, Stewart & Mackertich.
Target 2020: The Indian real estate market is expected to touch $180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country’s gross domestic product (GDP). Jimeet Modi, CEO, SAMCO Securities, said: “Falling inflation and lower interest rates will help the market size of this sector which is expected to increase at a compound annual growth rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India’s growing needs.”
More foreign investment: Market experts say the real estate sector is expected to draw more investment from non-resident Indians (NRIs) in both short term as well as long term. Bangalore is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.
Price volume breakout: Explaining the technical behaviour of the realty stocks, Chandan Taparia of Motilal Oswal said, “Most of the real estate stocks are crossing their hurdles with spurt in trading volume. Thus, they are attracting traders as well as investors to these counters to grab the immediate opportunity.
Strong PE interest: Private equity investment in real estate increased 26 per cent to a nine-year high of nearly Rs 40,000 crore ($6.01 billion) in 2016. The domestic realty sector has witnessed high growth in recent times with a rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received foreign direct investment (FDI) to the tune of $24.28 billion between April, 2000 and December, 2016.
Medium-term outlook good
Most market experts remain bullish on the real estate stocks even after their recent rally. They believe the rally is likely to continue in the medium-to-long term. “As one of the sectoral themes, the long-term story for real estate is still intact. On the valuation front, while stocks are not cheap, looking at the project pipeline, they are not expensive either. After the demonetisation drive, the market is expected to see a lumpy phase, but well-capitalised real estate companies with decent pedigree of management will do well, said Modi of SAMCO Securities.
Omkar Tanksale, analyst fundamental, GEPL Capital sees further upside in real estate stocks in the long run. “GST will be a boon for the sector,” he said.