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Real Estate Sector Analysis

Real Estate Sector Analysis

Published on 04 October 2021 Views 109 Comments 0
Recently, the Real Estate Sector stocks witnesses a strong rally where the Nifty Realty Index even hit the 10-years high mark this week. Also, the index outperformed the other category indices by substantial margins. Hence, this rally arises a question mark, that whether this rally is sustainable or there is another play? Let’s discuss the same in this article.

Introduction:

The Recent rally in the Realty sector reflects the optimistic development in the country’s real estate sector. The Nifty Realty index went up by 135% in the past year, while the Nifty50 index went up by 53% in the same period. Until a year back, realty stocks had been underperformers in the markets, especially after the Covid-19 pandemic. The realty index is the second-best performing sector in the markets after the metals index.

State Governments Moves:

  • The Real Estate sector of the economy witnesses a solid dropback initially due to Covid-19 Pandemic, but after some period, State Governments responded to this sector actively.
  • For instance, Maharashtra Government took the initiative of cutting down the stamp duty, which was also followed by other states as well.
  • Recently, Karnataka Government also lowered the Stamp Duty on Properties to 3% from 5%. This lowered stamp rate will be applicable on properties between Rs. 35 Lakh to Rs. 45 Lakh under Affordable Housing criteria.

Strong Uplift in Property Registration:

  • The Mumbai real estate market, a key indicator of the sector’s health, saw the highest property registrations in a decade. Despite Covid, Mumbai hit a 10-year high in property registrations in July and September 2021.
  • Mumbai is likely to see Property Registration figures of around 7,000 in September 2021, which is a record high in the last decade.
  • More than 6,000 units have already been registered in the first 21 days of September.

Past Performance & Current Scenario:

  • In the period between 2005-2015, the Indian Real Estate sector delivered significant returns of 35%-45% per annum across the country.
  • But as of now, where the economy was growing itself by 7%-8%, and 12%-13%, by adding up the inflation numbers, this return of 35%-40% is not justified.
  • Hence, this sluggishness was noticed in the real estate sector, post-2015, which was further impacted by Demonetization, GST, and other hindrances, and gone through a correction phase.
  • Also, the sector reported price correction in some parts of the country as well, especially in the Northern Region, and Time Correction in the other regions.
  • But due to low-interest home loans, and other supporting boosting factors, the pent-up demand has been created in the sector.
  • For the real estate sector to witnesses a sustainable bull run, there should be the creation of initial demand.

Important Factor:

  • In the case of the Real Estate Sector, the Debt-to-Equity Ratio, and Interest Coverage Ratio are the two most important things to look after.
  • DLF is having a debt-to-equity ratio of 0.19 whereas an Interest Coverage Ratio of 2.77 times which is a good place at the ideal ratio.
  • Another big player is Oberoi Realty, which is having a Debt-to-Equity ratio of 0.16 and a strong Interest Coverage Ratio of 14.18 times. The company is having good financials as well as Strong Promoter Holding.
  • While another player Godrej Properties is having a Debt-to-Equity Ratio of 0.55 with a very low-Interest Coverage Ratio of 0.80 times.

Conclusion:

Currently, the situation on the ground looks very well for the real estate sector due to the low interest rates on home loans, pent-up demand, and other supporting factors. Hence one should be watchful that whether this rally or the positivity in the real estate sector is sustainable or not. One needs to dive very well into the financials and Corporate Governance of the company in this sector. Do follow due diligence before making any investment decisions.
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