Nifty Realty down 7% from peak. Can property stocks buck sectoral churning to remain on top?

One of top performing sectors for more than a year, realty, is off its high point. Nifty Realty index, which represents a pack of top 10 real estate stocks, has declined 7% over the last three months, thanks to the election season which has slowed project approvals and launches. As markets are on a lookout for new winners with sectoral churing into effect, can it buck the trend to remain on top?

Eight stocks in the Nifty Realty index have fallen in double-digits from their 52-week highs with the highest decline seen in Macrotech Developers (Lodha) at 23%. The next in line are Mahindra Lifespace Developers and Sobha which have corrected by 18% and 19%, respectively.

Others including The Phoenix Mills, Sunteck Realty, Oberoi Realty, DLF, Godrej Properties, Brigade Enterprises and Prestige Estates have fallen between 17% and 7% from their 52-week top.

Stocks like Prestige Estates, Sobha and Brigade Enterprises remain multibaggers despite the correction. Their 1-year returns stand at 200%, 161 and 117%. The rest have gained between 30% and 90%.Real estate stocks have had a good run since March 2023 aided by rising sales of flats across the country, fall in inventory and gradual rise in property prices, Deepak Jasani, Head of Retail Research, HDFC Securities said as he sees the recent correction as a natural course arguing that the realty index’s rise over the last 18 months has been 188% and stocks are now witnessing consolidation despite the possible onset of rate cut cycle globally and later in India.

The softening in real estate stock prices could be linked to the onset of the election season which started with the general elections.

The three-phase Jammu & Kashmir election begins from today while Haryana will go to poll on October 5. Maharashtra and Jharkhand legislative elections are expected to take place later this year.

“Due to the general elections, the approval process for real estate projects experienced delays, which led to postponement of the launch pipeline by a few months and thereby affected pre-sales trends,” Rakesh Vyas, Co-Chief Investment Officer and Portfolio Manager at Quest Investment Advisors said.

Sales for the top seven cities were 10% lower on a YoY basis in July by volume (area sold) and slightly higher on a value basis, Jefferies said in a note. The launch activity was flat YoY versus 20% growth in April-May, it said.

Residential sales slowed in June and July though a 15% month-on-month improvement was seen in July as launches gradually revived post elections, the US brokerage said as it sees election related slowdown, as temporary.

Bucking the trend

The market’s preference have shifted to defensives like the IT, FMCG and pharma with investors looking beyond railway, defence and power sectors to tap fresh opportunities. Over the past three months, Nifty IT has grown by 26% while Nifty Pharma and Nifty FMCG have gained 18% and 13%, respectively.

Also Read: Sector churning: Power, defence, railway stocks fall up to 39% from peaks. What should investors do?

Vyas said that the approval process is returning to normal and with festival season and anticipated interest rate cuts, real estate demand is expected to improve. Additionally, rising asset prices should continue to stimulate investor demand.

Realty, which is an interest rate sensitive sector, could benefit from cuts. The Federal Reserve’s rate setting committee is expected to slash policy rates later today with other Central Banks following suit in due course.

Jefferies said that lower interest rates could be a much-needed trigger for the sector. It has picked Godrej Properties, Lodha, DLF and Sunteck.

Expert Sumit Kumar of JM Financial in chat with ET Now said that he expected around a 12% to 14% volume growth for this year and pricing growth somewhere in the 6% to 7% range extrapolating the overall industry growth at a 20% top line for FY25.

On the quantum of rate cuts in India, Jasani of HDFC Securities does not see a sharp climb down and opines that any meaningful impact on the EMIs could take time.

Valuations

Vyas finds some real estate stocks ahead of their fundamentals, as he admitted that lower pre-sales growth has led to a moderation in stock prices especially the largecap ones.

There are pockets of undervaluations, he said, citing Ajmera Realty & Infra and Kolte-Patil Developers as examples. Various drivers such as strong launch pipeline, large land bank, improving margin trajectory and strong business development are triggers of these stocks. “We have investments in stocks where we foresee robust medium term growth visibility and trading at significant discount to not just to the intrinsic value but even at steeper discount compared to peers,” he added.

(Data Inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)