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- Stocks of top developers ran up over 40%, and a few even doubled in the last three months.
- At these prices, most of the real estate sector’s upcycle has been priced in, say experts.
- With good land banks, and new launches most large players are expanding business, but investors are advised to wait for better entry points.
Indians love buying property and this has fuelled a real estate upcycle since Covid struck. But investors looking to take fresh bets on real estate stocks must be cautious due to the sharp run seen in most of the stocks in the last three months.
Stocks of top developers ran up over 40%, with a few outliers like Sobha that doubled in the last three months. At these highs, the sector’s valuations are stretched, say a few analysts.
“Developer stocks doubled in 2023 taking the sector to peak multiples. Expectations are high and easy scaleup is now behind,” said a report Jefferies, downgrading Prestige to ‘underperform’, Sobha to ‘hold’.
India has entered the fourth year of a property upcycle, which will still see growth but not aggressively in the last three years. On the other hand, the recent sharp rise has priced in very high growth, which has led to downgrades, considering the effect of cyclicality in growth.
There could be another trigger ahead with a possible affordable housing push announced in the upcoming Union Budget. But the sector still looks expensive, and most analysts bet that real estate stocks will consolidate in this calendar year.
Real estate sector returns
| Company | 3-month returns | 1 year returns |
| DLF | 45% | 112% |
| Sobha | 105% | 149% |
| Prestige Estates | 73.5% | 196% |
| Godrej Properties | 41.7% | 89.7% |
| Macrotech (Lodha) | 44.9% | 109% |
| Sunteck Realty | 3.9% | 19.8% |
| Oberoi Realty | 38.7% | 81.9% |
Source: BSE
Double-digit demand growth, but will cool off 2023’s highs
The Indian residential market is in the middle of an upcycle. In the last three years, home sale volumes have doubled. In 2023, volumes surged around 25%. Consumer demand is expected to be robust in 2024, and companies are poised for growth with. But the sector might not be able to replicate the growth rate seen in the last two years.
“A seven-year long weak phase for the residential market implies significant headroom for vols to rise in the medium term. As the housing upturn enters its fourth year in 2024, vols growth should cool down but still post around 10% year-on-year growth,” says Jefferies.
Most analysts believe that large players will post industry-beating growth rates of 15-20%. That’s because the top-end of the residential real estate market, in particular, has been racing ahead.
Recently, DLF was able to offload 1,137 apartments in its Gurgaon project within three days. They carried a price tag of ₹7 apiece.
In line with the demand growth, most developers had accelerated their inventory addition. Godrej added ₹32,000 crore worth of gross development value (GDV) in FY23 against the guidance of ₹15,000 crore. Macrotech also surpassed its business development guidance of ₹15,000 crore adding ₹19,800 crore worth of GDV in FY23.
As of FY24, most of these players are also expected to add to their land banks. “With robust balance sheets, low cost of capital and strong brands, organized players are at an advantage in adding new business development and are positioned for further market share gains,” said HDFC Securities Institutional Research.
With more sales on the horizon and sharp uptick in construction activities, the sector is all set to see good cash flow gains through 2024. The fundamentals are all in place, but investors have to wait for better entry points into these stocks, advise analysts.