Nifty Realty index jumps 40% in six months; Sunteck Realty, Sobha, Mahindra Lifespaces among real estate stocks to buy

The Nifty Realty index has surged over 40% in the last six months and is trading near its 52-week high levels. The index has gained over 33% in 2023 so far.

The rally has been led by strong gains in shares of real estate companies having clocked record residential sales bookings in FY23 supported by allaying concerns over rising mortgage rates impacting demand.

In the last six month period, Macrotech Developers shares have rallied nearly 55%, Prestige Estates Projects jumped over 58%, DLF shares surged 43%, Godrej Properties up 40% and The Phoenix Mills soared 36%.

Among other Nifty Realty constituents, Brigade Enterprises, Indiabulls Real Estate, Oberoi Realty and Sunteck Realty are up in the range of 25%-35% in the last six months.

The overall Indian residential market size across India’s top 8 cities in FY22 crossed FY20 levels (pre-Covid), while FY23 industry sales booking value grew 36% YoY to ₹29,000 crore.

While H1FY24 is expected to be muted in terms of launches, most real estate companies have a large launch pipeline for the festive season and H2FY24. 

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ICICI Securities estimates the pan-Indian residential market share for its coverage universe to grow from 24% in FY23 to 27% in FY25E driven by a sales booking CAGR of 11.5% over FY23-25E. 

“While the pace of market share gains is expected to be slower given the strong market share gains already achieved over FY20-FY23, we estimate the pan-Indian residential market share for our coverage universe to grow from 24% in FY23 to 27% in FY25E.,” the brokerage firm said in a report.

Moreover, interest rates or mortgage rates, which were in March 2022 at their lowest since 2005, started to rise amid monetary policy tightening by the central bank.

Interest rate hikes in FY23 globally and in India have led to large lenders increasing home loan mortgage rates by 240-250 bps from 6.7% to around 9.2-9.3%. This translates to an 18-22% higher monthly EMI outgo for new home buyers over a 20-year loan tenure. 

At the same time, residential prices have also risen by 9% over the last 15 months. 

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However, ICICI Securities believes that this may not significantly impact demand as overall affordability levels as per HDFC Limited, remain healthy at 3.3x annual income, the best in the last 25 years. 

Even assuming that mortgage rates may rise by another 25-50 bps in FY24, the brokerage believes that developers would look to provide incentives such as builder subvention for a limited period of 2-3 years.

With developers continuing to follow pricing discipline and aligning price increases in line with inflation or salary hikes (5-7%) while reining in debt levels, any downward revision in mortgage rates going ahead may boost demand further, the brokerage house said.

It remains constructive on the residential space over FY23-25E.

Among top bets in the real estate sector, ICICI Securities has ‘Buy’ ratings on Brigade Enterprises, Mahindra Lifespace Developers, Sobha Ltd and Sunteck Realty.

It has ‘Add’ calls on DLF, Oberoi Realty and Prestige Estates Projects. ICICI Securities recommends ‘Hold’ on Macrotech Developers and ‘Sell’ on Godrej Properties.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.