Inflation overdone; Real estate to grow in near future: Report

According to the ‘Bulls and Bears’, Indian valuation handbook, Indian real estate segment shows a good growth with largest ever launch in the pipeline by most real estate companies

Motilal Oswal Financial Services Limited’s (MOFSL), India valuation handbook ‘Bulls and Bears’, May 2022 edition stresses on the fact that the fear of inflation is overdone and the realty segment will see a good growth going forward.

According to the report, most Indian real estate companies have witnessed a 10%-15% rise in construction costs. Now even if the cost is around 25%-40% of the sales price, the overall impact on margins is restricted to 3%-4% only and the realty companies have been able to push a price hike of 5%-8% on portfolio level comfortably.

Strong pre-sales

Affordability, rising need of home ownership and sector consolidation etc. have paved the path for the Indian real estate sector to again see strong pre-sales momentum since the onset of Covid-19. The handbook mentions that with the largest ever launch in the pipeline by most Indian real estate companies, the Indian realty segment is expected to see a healthy demand in the near future.

Reduction in inventory overhang

Since 2013-14, though the housing demand has remained stagnant, the inventory levels have seen significant correction driven by consistent decline in new launches. As per MOFSL, unsold inventory has dipped notably to 4, 37, 000 units from the peak of 7, 70, 000 units in CY13 with the overhang now reducing to 23 months.

Impact of interest rate hike

According to the MOFSL report, while the impact of interest rate hike is expected to be minimal in spite of a similar hike which was made recently, it can have a negative impact as the rates start moving closer to 8%. In that case, most developers will have a 10%+ borrowing cost and this will in turn have an impact on their return profiles.

Realty sector valuation

The report highlights that the top 12 listed companies posted 43%/45% YoY growth in bookings in FY21/FY22. This should have ideally resulted in further re-rating of the stocks, but the rising cost pressure along with recent interest rate hikes have built in expectations of margin erosion and demand slowdown. Hence, post the recent correction, many stocks have now entered the value zone.

The sector valuation has corrected to below its long-term average P/E of 23.2x and is now trading at 21.2x on a one-year forward basis.

Source: housing.com

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