Builders to face growth test ahead

For instance, Godrej Properties Ltd on Monday said its quarterly and annual sales bookings hit a record high. Godrej’s FY23 volumes surged 40%. Last week, Sobha Ltd said it had the best-ever quarterly pre-sales in Q4. Furthermore, Macrotech Developers Ltd (Lodha) said it had surpassed its FY23 pre-sales guidance.

Consequently, Godrej’s shares rose as much as 9% on Monday, while shares of Lodha and Sobha climbed 3%, each. Sobha’s update came on Thursday after market hours, and Lodha’s on a market holiday on account of Good Friday.

Interestingly, despite rising home loan rates, residential realty demand has remained firm, at least so far. In fact, as Motilal Oswal Financial Services Ltd points out, real estate companies under its coverage will comfortably breach FY23 (pre-sales) guidance. The brokerage estimates aggregate sales and volume in Q4 to jump about 38% and 18.5%, respectively, on a year-on-year basis.

The Reserve Bank of India’s latest move to keep the repo rate unchanged has come as a shot in the arm for this interest-rate sensitive sector. Note that the affordable housing segment has borne the brunt of higher loan rates in the form of subdued demand. As such, notwithstanding the jump on Monday, the Nifty Realty index has fallen by 11% in the past year on worries of demand slowdown due to rate hikes.

That said, companies with more exposure to the luxury residential segment would fare better in Q4. Customers in this segment tend to be immune to interest rate hikes. “In general, luxury residential projects should see strong sales traction owing (to) the cap on capital gains relief on purchase of new home restricted to ₹10 crore from April 2023,” said a Kotak Institutional Equities report. DLF Ltd, Lodha and Oberoi Realty Ltd are seen as potential beneficiaries of the strong traction in luxury residential projects.

The moot question now is on the extent of growth that lies ahead for realty firms. “With some companies seeing record pre-sales in Q4 and some others breaching FY23 pre-sales guidance, commentary on demand trajectory and launches is crucial to understand what will drive incremental growth from these levels, that is, on a high-base,” said an analyst seeking anonymity.

To be sure, the ongoing sector consolidation is said to be aiding market share gains and pre-sales outlook for listed developers. Also, many real estate companies have been on a debt reduction spree. This means that the expected rise in borrowing costs should not be a worry for companies with low leverage. But, in the current backdrop, these factors may not be enough to drive a significant re-rating in real estate stocks. “We see re-rating potential in companies with growth visibility aided by continued business development through robust cash flow potential,” added the Motilal Oswal report.

Also, with elevated home loan rates, developers may not be able to take steep price hikes, which may have a bearing on the sector’s realizations and growth outlook. Further, the slowdown in the IT sector, leading to large-scale job losses can throw a spanner in the works for housing demand. Note that there is still scope for another rate hike, depending on inflation data. So, the spectre of rate increases is not completely out of the sector’s way. Therefore, a significant turnaround hereon would largely depend on how the sector’s demand and supply (inventory levels) dynamics play out.