Why this may be the best time to invest in real estate stocks

GREED & fear said now is the time to add exposure to property stocks if it is believed that the end of the Indian monetary tightening cycle is at hand. These stocks went vertical in the second half of 2021 when it became clear that the property upturn was finally underway. But they have traded sideways to lower during the RBI’s 290 basis point monetary tightening cycle since last April.

Still they are now up 25 percent from the recent low reached in late March. Nifty Realty index rose 18 percent compared with Nifty 50 rising 11 percent.

 

During Friday's trading session, the Nifty Realty index was one of the top sectoral gainers, rising 1.25 percent to close on a positive note. From the Nifty Realty pack, shares of Phoenix Mills (up 5.54 percent), Macrotech Developers (up 5.4 percent), Indiabulls Real Estate (up 4.16 percent), Mahindra Lifespace Developers (up 1.75 percent) and Brigade Enterprises (up 0.51 percent) ended the day as top gainers. On the other hand, Prestige Estates Projects (down 4.32 percent), Oberoi Realty (down 0.89 percent) and SOBHA(down 0.71 percent) finished as the top losers of the day.

The index has now gained 8.36 percent so far this year. As many as seven out of the 10 index constituents are trading with gains on a year-to-date basis. Over the last 12 months, the index has gained nearly 22 percent, where gains have been led by Godrej Properties, DLF, Macrotech Developers, Phoenix Mills, Prestige Estates Projects Limited, Mahindra Lifespace, Sobha, and Oberoi Realty.

The note said that GREED & fear is already heavily invested in these stocks in the various portfolios but will take the opportunity to add to exposure this week. "Still one point to note about the property upturn, which GREED & fear has become more aware of this week, is that it is very heavily skewed to the middle-class and luxury markets whereas the affordable housing segment remains relatively lacklustre," the note stated.

This reflects a broader trend that the rich have been getting richer in India in the recovery out of Covid-19. Still trickle down should now be happening with the construction upturn triggered by the housing recovery leading to a pickup in rural remittances as migrant labour goes to work on construction sites. Residential starts rose by 30 percent on-year to 570m square feet in the 12 months to March, the highest level since November 2013.

If the residential property story remains straightforward, with affordability not really challenged by the recent monetary tightening cycle as previously discussed here, the really interesting point to GREED & fearis the acumulating evidence that India could be on the brink of a major capex cycle. The macro evidence for this is that gross fixed capital formation has begun to move up as a percentage of nominal GDP, having been in a downtrend since FY09. The gross fixed capital formation to GDP ratio declined from a peak of 35.8 percent in FY08 to 27.3 percent in FY21 and has since risen to an estimated 29.2 percent in FY23.

Meanwhile the bottom-up evidence is that private sector new project announcements, a good leading indicator, are surging. Private new project announcements have risen from Rs 5.1 lakh crore in FY21 to Rs 25.7 lakh crore in FY23.

While the order books of industrial companies are growing. For example, Larsen & Toubro’s order flow rose by 19 percent on-year in FY23.

From the stock market standpoint, the already high multiples in the quoted industrial stocks are likely to be sustained, if not expanded, given the lack of liquid names. L&T and Thermax, which are both in GREED & fear’s long-only India portfolio, are currently trading at 24 times and 36 times FY24 earnings, respectively.

The real estate companies are doing very well. The real estate market is divided into residential and commercial. The residential is doing very well but in commercial there’s a lot of unsold inventory. So, as per Prudent Equity Director Siddharth Oberoi, instead of buying a property, investors can invest in real estate equity because they can then make a basket of four or five stocks.

Godrej Properties (Add)

DLF (Buy/Add)

Sobha Developers (Buy)

Macrotech Developers (Buy)

Phoenix Mills (Buy)

Mahindra Lifespaces (Buy)

Brigade Enterprises (Buy)

Oberoi Realty (Buy)

Prestige Estates (Buy)