What real estate stocks indicate, about the prevailing market sentiments…

Can an investor gauge the real estate sector’s demand and supply, by looking at the performance of realty stocks? We look at the connection between the stock market and buyers’ sentiments

The stock market is said to be the one of the best indicators of buyers’ sentiments in the real estate market. Often, the demand and supply in the realty market, can be closely approximated by looking at the shares and financial results of companies. Experts point out that the performance of a stock of a real estate company with only residential business, is a reflection of the company’s operating performance. This means that if the company’s sales volumes goes up, the top-line will increase vis-à-vis its earnings but if volumes go down, its performance will witness downward pressure.

 

Real estate stocks’ performance indicates market mood

The quarter-on-quarter (QoQ) results of realty companies, indicate that the sales momentum is either steady or slightly getting better, while revenues are maintaining the same pace, due to the collections from sold projects, explains Abhishek Lodhia, senior equity research analyst – infrastructure, capital goods and real estate at Angel Broking.

“On a year-on-year (YoY) basis, FY17 has been worse than FY16, as both, sales volumes and revenue dipped. Home buyers were in a wait and watch mode, anticipating that property prices will correct sharply. Moreover, with sales not happening at a traditional pace, developers were sceptical about launching new projects and were pushing the sale of finished inventory,” Lodhia explains. With many developers managing to reduce their inventory to minimum levels, new launches have again picked up pace. The government has also given many sops to buyers and developers, which have turned sentiments positive.

See also: Is this a good time to invest in real estate stocks?

 

Is the realty market headed for consolidation?

Vinay Betala, associate director – corporates, India Ratings and Research, however, says that the Indian real estate market is still grappling with the double whammy, of cash shortage caused by demonetisation and the introduction of the Real Estate Regulatory Act (RERA).

“This, along with the increasing refinancing risk, will shake-up the sector, with developers having high leverage losing out. The sector also needs to undergo a structural change, in the way it does business and move towards a model where projects are completed before sale. Such a structure would favour real estate companies that have better access to funding. Larger players with access to multiple funding sources, such as NBFCs, PE funds and FDI in addition to banks, are likely to have an advantage. This could lead to consolidation, which may be in the form of land sales or joint development of land with larger organised and well-funded developers,” says Betala.

 

Factors that have affected the performance of realty stocks

According to analysts, demonetisation and the income disclosure scheme for black money, negatively affected the reality sector, initially. However, other announcements, such as the credit-linked subsidy scheme for the middle-income group (MIG), granting of infrastructure status to affordable housing and simplification of norms for REITs and InvITs, have lifted sentiments and pushed real estate stocks upwards. They expect the implementation of RERA to be a game changer for the realty sector.

 

Where are real estate stocks headed in the near future?

“As far as property prices are concerned, Hyderabad, Bengaluru and Pune may not see any correction, as the spread between the selling price and ready reckoner rates, is very thin. Mumbai may see a small price correction, while Delhi and NCR prices have already bottomed-out and may remain flat, till sales in the region increase meaningfully,” adds Lodhia. A company’s market value is a function of the number of units sold and this again depends on home buyers’ trust in the company and its brand. Consequently, if the company manages to deliver on time, then, home buyers feel safe to buy from such a developer.

 

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