Real estate firms on solid ground
Summary
The March quarter of FY23 saw bumper bookings in the residential segment helping developers close the year on a strong note.
Listed real estate companies showed resilience with stellar pre-sales at a time when interest rates were rising. The March quarter of FY23 saw bumper bookings in the residential segment helping developers close the year on a strong note.
The quarterly operational update released by some key listed companies shows that decent residential sales continued in the June quarter (Q1FY24), too. For instance, Macrotech Developers Ltd saw bookings grow 17% year-on-year (y-o-y) to ₹3,353 crore, also the highest Q1 number delivered by it. With that, the company has achieved 23% of its FY24 pre-sales guidance of ₹14,500 crore. Prestige Estates Projects Ltd saw sales value growth of 30% y-o-y in Q1.
On an aggregate basis, Motilal Oswal Financial Services Ltd expects realty companies under its coverage to clock 9% y-o-y volume growth in Q1FY24. Of course, given the high base, sequentially volume could be soft.
Nonetheless, investors seem to be in an upbeat mood. In this calendar year so far, Nifty Realty Index has rallied by 24.2%. Also, with interest rate hikes largely out of the sector’s way, sales could get a further fillip as home loan rates could remain steady.
The premium and luxury segments could continue to do well, however, affordable housing, which is relatively more sensitive to higher interest rates could take time to revive. “Higher mortgage rates have hit affordable and mid-income housing, but luxury demand remains indifferent to the interest rate. This is because luxury segment is driven by wealth effect," Parikshit Kandpal, vice president, Ins-titutional Research, HDFC Securities, said. And since most listed real estate companies have meaningful exposure to this segment, it augurs well for their sales prospects.
But to keep sales growth intact, the pace of new launches is crucial going ahead. “Considering a scenario where the interest rate hikes are unlikely in the medium-term, companies could have strong business for next two years (FY24 and FY25). But this depends on how fast they are able to launch proj-ects and new business developments," said Ronald Siyoni, associate vice president, Sharekhan by BNP Paribas.
So, management comm-entaries on new launches are crucial. Along with demand, supply trends are important for the sector’s pricing outlook. “In line with seasonal trends, new project launches across markets are likely to moderate in Q1FY24 post-strong Q4FY23. Further, the companies are likely to focus on churning inventories at existing projects," said the Motilal Oswal report. Meanwhile, robust sales aided cash flows of listed companies, helping them to pare debt. The net debt of the top eight listed developers fell to over ₹23,000 crore in FY23 from ₹40,500 crore in FY20, recording a decline of 43% in the period, showed an analysis by Anarock Property Consultants. On a yearly basis, net debt of developers has remained almost stable in FY23 as compared to year ago period, showed the Anarock data. However, a sustained pause on interest rates and eventually rate cuts could lower cost of borrowings for the sector, thus, aiding expansion plans.Further, the ongoing consolidation especially in select micro markets should aid market share gains for listed developers. “The industry continues to consolidate with residential developments steadily shifting into hands of stronger developers who have been able to weather the economic storm created by the pandemic," said Knight Frank India in a recent report. Developers are also finding takers for their under-construction inventory, it added. On the flip side, the ongoing slowdown in the IT sector, leading to job losses, can hurt housing demand.
