Perking up

The massive rally that drove the Indian market to record highs, has had a positive rub off on the beaten down real estate stocks. Most realty stocks have made sharp gains during the year, as the sentiments seemed to have improved for the sector.

Both institutional and retail investors are said to have bought into the beaten down reality sector stocks.

The BSE S&P Reality Index has gained 58 per cent in the past six months making it one of the best performing sectors, while the benchmark Sensex have gained 18 per cent during the period. Stocks like Godrej Properties, Indiabulls Real Estate, Omaxe, Sobha and DLF have gained 15 to 55 per cent in the past six months. According to experts, investors were betting on the sops that come in the budget, as well as improved sentiments with the implementation of GST. Even institutional players like domestic mutual funds have bought into real estate stocks.

According to reports, mutual fund managers who have historically been underweight on real estate stocks for many years have increased their stake in these companies.

As on May 31, 2017, the mutual fund industry had an aggregate exposure of Rs 2,000 crore to real estate stocks, which represents a meagre 0.3 per cent of the overall equity exposure held by funds. 

Over the last one year, the value of this exposure has almost doubled from Rs 1,100 crore in March 2016, which is primarily due to rise in the underlying stock prices and also some selective buying in certain stocks. 

The top stocks held by mutual funds are Brigade Enterprises, Prestige Estates, Godrej Properties, Sobha Ltd. and DLF. Amongst these, Brigade, Godrej Properties and Sobha have seen additions in the last one-year, especially in 2017 after the stocks corrected post demonetisation.

DLF has witnessed fund managers reducing positions. Overall, the manager sentiment towards real estate stocks remains muted, barring a few names. The introduction of regulations, such as the Real Estate Regulatory Act (Rera), Benami Transactions (Prohibition) Amended Act, Real Estate Investment Trusts (Reits) and Goods and Services Tax (GST), should improve long-term growth, transparency and enhance overall investor sentiment, say experts.

Currently, homebuyers pay a number of taxes (VAT, service tax, excise duty, stamp duty, registration charges) and GST will bring a uniform tax structure into the system.

Under GST, 12 per cent tax will be levied on purchase of new property, excluding stamp duty. It would also bring down the project cost because of the scrapping of the above taxes.

The tax rates for major inputs have been marginally increased. Earlier, indirect tax on steel was around 17 per cent, which is now pegged at 18 per cent under the GST. Total taxes for cement was 24 per cent and now stands at 28 per cent. 

However, prices and sales may remain muted for some more time. “Given the weak sales volume amid the changed regulatory environment, we expect decline in real estate prices by 20 per cent or more because of distress sales and consolidation in the market as weak developers will be unable to compete. Sales volume will remain weak for a year because of subdued sentiment with the anticipated negative news flow,” says Nirmal Bang Securities in a recent report.

The holding cost is likely to go up for developers. The rental housing market will also be affected post-GST, as the government would be looking to tax residential leases. All these factors will take India's real estate sector in an upward trajectory and insiders project more people making a beeline to invest in the sector.

According to Edelweiss Securities, “new launches are expected to be lackluster, as developers focus on registering ongoing projects. We hence expect significant supply slowdown in the near term resulting in meaningful fall in new sales. This, however, should recover over the coming months as Rera registrations pick up. Supply constraints may lead to some price uptick in available inventory. In the medium term, less capitalised/non-serious players may find complying with Rera provisions difficult, leading to partial/full exit from their projects.”

The report further added: “serious/well-capitalised players should benefit from this with increased demand and higher realisations. In the long term, we see serious participants with the ability and willingness to comply with Rera continuing in business. The provisions of capital adequacy, full disclosures and strict penalties should lead to greater transparency and increased customer confidence. This coupled with favourable long-term fundamentals should benefit the sector. Maintain ‘BUY’ on Brigade, Oberoi, Sobha and Sunteck; ‘HOLD’ on DLF and Godrej Properties.” That is as precise as it gets.