Realty stocks lose some ground as property boom takes a breather

Realty sales volumes in the top ten cities dropped 8% in the first five months of the current fiscal year (FY25) through August, compared to the same period last year, according to data from Propequity compiled by Antique Stock Broking. While new project launches remained flat, unsold inventory continues to rise, the brokerage noted in a report on 23 September.

Several factors are contributing to this slowdown. Delays in approvals, particularly due to election-related disruptions, have hampered the pace of new launches. Additionally, uncertainty around changes to capital gains tax for property, announced in the Union Budget, may have weighed on sales in July. The result: a halt in the rally of realty stocks. The Nifty Realty Index, which hit an all-time high of 1,157.35 in June, has since slipped by roughly 4.5%.

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A slower pace of project launches is expected to impact the pre-sales growth targets of real estate companies, which range from 15% to 35% year-on-year. The impact could be steeper for those who are sitting on relatively lower levels of ready inventory of housing units.

According to IIFL Securities, the June quarter (Q1FY25) saw only 16% of overall FY25 guided launches. The launches in Q2FY25 are likely to mirror that of Q1FY25 and hence could negatively impact pre-sales for some companies such as DLF Ltd and Oberoi Realty Ltd, said IIFL in a report on 13 September. Further, the brokerage’s feedback from channel checks suggests high double-digit price increases especially for the National Capital Region and Bengaluru launches may be over.

Against this backdrop, the fall in stocks of large realty companies from their recent highs reflects investor concerns about demand-supply dynamics. True, the pace of new launches is widely anticipated to pick-up in the second half of FY25. Among the awaited launches are DLF's Goa Villa project, Lux 5 in phase 5, TPC Indirapuram and Nautilus by Prestige Estates & Projects Ltd, Oberoi Realty’s Pokhran, Thane project. 

Plus, a potential interest rate cut by the Reserve Bank of India would mean relatively cheaper home loans. This could work as a sentiment boost for the affordable housing category, where pre-sales have remained sluggish for a while now.

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Even so, given the slow start to FY25, there is a lot of ground to cover. Eleven realty companies under Antique’s coverage have reported aggregate pre-sales of ₹27,800 crore in Q1FY25. To meet their full-year targets, these companies will need to achieve an additional ₹97,600 crore in pre-sales, which will depend on new launches with a combined gross development value of ₹1.52 trillion and ongoing inventory worth ₹1.47 trillion, it said.

The Bengaluru market is facing the challenge of delayed approvals. Here, Sobha Ltd, Brigade Enterprises Ltd, Century Textiles Ltd and Prestige Estates have significant exposure. They face risk of delay in launches and/or increased costs due to delays. Further, state elections in Maharashtra and Haryana, likely in Q3FY25, could weigh on real estate approvals/launch activity in key markets of Mumbai Metropolitan Region, Pune and Gurgaon. Any potential tweaks in stamp duty payable on property transactions post these elections by the state governments will be monitorable.

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Yet, despite recent weakness, the Nifty Realty Index has surged 38% so far in 2024, outperforming the Nifty50 benchmark. Consolidation in the sector has helped bolster pre-sales for listed developers, while strong cash flows have allowed them to deleverage. While the market has rewarded these stocks for their resilience in a high-interest-rate environment, valuations remain expensive. With a high pre-sales base set in FY24, there is concern that realty companies may find it challenging to continue delivering positive surprises.