Realty stocks riding high, but investors need to be selective

Mumbai: Shares of realty companies have been among the top performers in the recent bull cycle but with interest rates firming up of late, investors must be choosier about their picks in the sector. Analysts prefer leading property developers such as Macrotech Developers (Lodha), DLF, Prestige Estates Projects and Oberoi Realty at this juncture.
The BSE Realty index is down 31% from its 52-week high of 4,464.31 of November 9, 2021 as against the Sensex's decline of 12% in this period. The Sensex is down 14.6% from its 52-week high of 62,245.53 hit on October 19, 2021. Analysts said investors might be tempted to pick up beaten-down stocks in the sector but with liquidity tightening, fewer shares might outperform going ahead.
"Interest rates have risen which does not bode well for the sector," said Gautam Duggad, head of institutional equities at Motilal Oswal Financial Services. "One should not exit the sector completely but be selective." The brokerage prefers Lodha and Oberoi over Godrej Properties and DLF.

The BSE Realty index has fallen over 16% from April 1 amid weakening market conditions and rising domestic interest rates. The Sensex has declined 9% in this period. The Reserve Bank of India has hiked interest rates twice already - an out of turn 40 basis point hike and the recent 50 basis points increase in its last policy review - since May.

Economists and money managers estimate RBI could hike rates by a total of 200 basis points taking the repo rates to 5.5-6% by early 2023.

Analysts said that historically higher mortgage rates have not impacted demand but they affect investor sentiment in these stocks. Some developers have guided for a strong business outlook for the ongoing financial year.

“Broader property sales and registrations will continue to be strong as some asset reallocation is seen moving from equity to real estate among people who have made money in equities in the last two years,” said Aniruddha Sarkar, CIO at Quest Investment Advisors. He is bullish on DLF and Prestige Estates.

“We believe they will outperform the market giving double-digit returns over the next year. Both these companies have a good blend of residential and commercial estate,” said Sarkar. Prestige is coming up with some large commercial projects in Mumbai also and could become landmark projects in 2-3 years, he said.

Jefferies said that the data from property consultants, registration data and recent developer comments suggests that housing demand was good in April-May period despite rising mortgage rates.

“Rising rates have triggered correction in realty index, though given the developer discipline, we believe there is a case for stocks to trade at higher multiples than previous such tightening cycles,” said Jefferies, which prefers Godrej Properties, DLF and Macrotech Developers.