Nifty Realty up 42% this year so far; DLF, Prestige Estate jump over 50%; can realty stocks rise further?

Realty stocks have been witnessing healthy gains this year so far thanks to strong demand and healthy earnings. Foreign capital inflow into the sector is also a reason behind the rise in realty stocks.

According to Nasdaq-listed investment management company Colliers, India received foreign institutional inflows worth $26.6 billion into real estate during the six-year period from 2017 to 2022, a three-fold rise from the preceding six-year period. According to the report, foreign investments accounted for a sizeable share of 81 per cent of the total investments in real estate during 2017-22.

"The country's investor-friendly FDI policies, increased transparency in deal structures, and higher investment limits through the direct route have encouraged global investors to invest in India's real estate sector," it said.

The Nifty Realty index has jumped almost 42 per cent this year so far while the Nifty 50 has gained just 9 per cent. Stocks such as Prestige Estate and DLF have gained over 50 per cent while the stocks of Macrotech Developers, Mahindra Lifespaces and Phoenix Mills have gained over 40 per cent this year so far.

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Can realty stocks rise further?

Realty stocks can gain further and experts believe organised players will gain the most going ahead. With the return to office picking pace and interest rates expected to go down after a few months, the stocks from the sector could rise further in days to come.

As the brokerage firm HDFC Securities pointed out, real estate developers are reporting record presales in the seasonally weakest quarter Q2.

"Sobha ( ₹1,700 crore, growth of 48 per cent YoY and 18 per cent QoQ), Prestige ( ₹7,100 crore, growth of 102 per cent YoY and 82 per cent QoQ), Macrotech ( ₹3,500 crore, growth of 12 per cent YoY and 5 per cent QoQ) and Phoenix Mills (consumption of ₹2,640 crore, growth of 9 per cent YoY but flat QoQ on a like-to-like basis) have reported record presales in the second quarter," HDFC Securities observed.

The brokerage firm expects this momentum to continue in Q3FY24 with new launches adding a multiplier effect to the presales.

"Within micro-markets, we expect the consolidation story to continue in the top six cities with strong volume-driven growth in Bengaluru, MMR (Mumbai Metropolitan Region) and Pune, while NCR growth will be driven largely by higher price appreciation in the luxury segment," HDFC Securities said.

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Real estate is a rate-sensitive sector but HDFC Securities believes interest rates are no longer a determining factor for the demand in the sector.

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The brokerage firm said a higher mortgage rate has the potential to hit affordable and mid-income housing whilst luxury demand remains indifferent as the luxury segment is driven by the wealth effect. The recent GDV (gross development value) addition by developers like Prestige, Godrej and Macrotech shows a higher tilt towards premium projects.

"We are seeing higher presales growth from the premium real estate segment in the NCR and Bengaluru markets, which are resulting in higher average price realisation for developers," said HDFC Securities.

The brokerage firm expects the aggregate revenue, EBITDA and PAT for its coverage universe to report YoY growth of 30 per cent, 32 per cent and 37 per cent, respectively. On an aggregate level, the brokerage firm expects the YoY margin to expand by 137bps QoQ in Q2FY24.

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DLF, Oberoi Realty, Sobha, Mahindra Lifespaces, and Prestige Estates Projects are the top picks of HDFC Securities in the realty space.

"We like Oberoi Realty as it has no competition in the premium real estate segment and has planned a slew of launches for the second half of the financial year (H2FY24). Mahindra Lifespaces may continue to outperform on industrial and new land bank additions. Besides, DLF is a play on the NCR market and late-cycle commercial office recovery. In southern markets, we like Sobha and Prestige Estate," said HDFC Securities.

Another brokerage firm Nuvama Wealth Management believes developers with strong rental portfolios such as DLF, Brigade Enterprises and Embassy Office Parks would benefit from the likely revival in office space demand over the medium term.

Nuvama has a buy call on DLF and Brigade Enterprises.

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