Realty stocks' rally may hit valuation hurdle

Shares of real estate firms have been outperforming over the past year.

The rally, analysts say, may hit roadblocks in the near term amid stretched valuations, even as the long-term prospects for the sector remain ebullient.

“Most of the positive news flow is already in the price. Hence, investors sitting on hefty profits may partially cash out at current levels,” suggests V K Vijayakumar, chief investment strategist at Geojit Financial Services.

New investors, meanwhile, he said, could wait for corrections to enter the sector as rich valuations make the pack unattractive from a risk-reward perspective.

Over the past year, the Nifty Realty index has soared 102.3 per cent on the National Stock Exchange, as against the 19 per cent surge in the benchmark Nifty 50 index, ACE Equity data shows.

Individually, the shares of Prestige Estate Projects have zoomed 190 per cent, while those of Brigade Enterprises, DLF, Macrotech Developers and Sobha have soared between 107 per cent and 118 per cent, respectively.

Real estate investment trust (REIT) stocks, however, fell in the range of 1 per cent to 17 per cent.

The Nifty Realty index is trading at a trailing twelve-month (TTM) price-to-earnings (P/E) multiple of 86.3 times (86.3x) as against the five-year historical average of 69.4x, and the 10-year average of 55.2x.

Among stocks, Sobha is trading at 119x (vs 5-year/10-year average of 43.2x/31.4x), DLF at 96.2x (vs 54.2x/49.6x), Brigade Enterprises at 76.3x (vs 54.9x/33.9x), and Prestige Estates at 56.4x (vs 19.5x/22x).

By comparison, the TTM P/E of Nifty50 is at 24.8x versus the 5-year average of 24.7x and 10-year average of 26.5x.

Apart from stretched valuations, the cyclical nature of the real estate sector makes it a risky bet at a time when overall markets, too, are stretched, analysts added.

Suitable for long-term gains

Analysts remain bullish on the sector from a long-term perspective as premiumisation of products, new launches, market share gains by organised players, and hopes of interest rate cuts in the calendar year 2024 keep the growth outlook intact.

“The traction in the housing market is visible across segments, especially the premium and luxury categories.

"We expect real estate companies to post healthy results in the coming quarters,” said Dhruv Mudaraddi, research analyst, StoxBox.

According to real estate consultancy Colliers, the Indian real estate sector witnessed investment inflows worth $5.4 billion in CY23, up 10 per cent year-on-year (Y-o-Y), and the highest since 2020.

The office sector cornered $3 billion worth of inflows — 56 per cent of total inflows.

This was followed by industrial and warehousing assets, which stood at $877.6 million, up 108 per cent Y-o-Y and residential assets at $789 million, up 20 per cent Y-o-Y.

“Resolution of the SEZ issue, traction build-up in leasing to Global Capability Centres, and steadfast economic growth are likely to ratchet up office demand.

"A potential interest rate cut shall also act as a re-rating trigger.

"We initiate coverage on Embassy REIT, Mindspace REIT, and Brookfield REIT with ‘buy’,” noted Nuvama Institutional Equities.

Within the residential market, the sales figure touched the highest in a decade last year.

Data compiled by consultancy firm Anarock Research suggests housing sales in the top seven cities hit a new peak in 2023 with around 476,530 units being sold last year as against the 364,870 units in 2022, which is a 31 per cent Y-o-Y rise.

The top seven cities include Delhi-NCR, Mumbai Metro Region (MMR), Bengaluru, Pune, Hyderabad, Chennai, and Kolkata.

“With the help of RERA (Real Estate Regulation and Development Act), and Goods and Services Tax (GST) organised players have gained market shares as they have more capital and better technology to deliver housing units on time.

"Amid the growing demand for premium products, organised players are set to gain further.

"The sector is in a long-term upcycle,” said AK Prabhakar, head of research at IDBI Capital, who prefers Macrotech Developers, Kolte-Patil Developers and Ganesh Housing Corporation.

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