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4QFY22 was a record quarter for the real estate sector, with many developers reporting their best-ever presales/collections. This led to a strong end to FY22. The top 10 listed developers cumulatively launched 45msf in FY22 v/s 33msf in FY21.

The same is expected to increase to 70msf in FY23 as per their disclosed pipeline. On the back of a healthy pipeline, developers are targeting double-digit growth in pre-sales in FY23.

The top 10 listed developers delivered 36/48 per cent volume/value growth in FY22, while the top four markets reported a 28/35 per cent growth in volume/value terms.

This led to a marginal rise (18/22 per cent) in market share in value/volume terms.

This trend is likely to accelerate further on account of:

1) a healthy launch pipeline of ~70msf as indicated by the top 10 listed developers v/s the 45msf launched in FY22

2) cost inflation, increase in the cost of capital, and constrained demand due to higher mortgage rates

This will likely work in favor of more prominent developers, leading to further market share gains.

On the cost front, most companies witnessed a 12-15 per cent rise in construction costs. Since the same constitutes just 25-40 per cent of the sale price, the overall impact on margin is restricted to 3-6 per cent.

Companies have mitigated this cost impact via price hikes of 5-8 per cent in FY23. They are looking to raise prices further to improve margin.

The rise in interest rates was imminent. However, with no respite on inflation globally, the quantum of increase remains uncertain. Developers agree that a sub-8 per cent mortgage rate is unlikely to have any material impact on demand.

A large part of the current demand remains end-user-driven. Thus, any increase in mortgage rates beyond 8 per cent will lead to push out in demand for a couple of quarters. Developers are coming up with strategies to mitigate this rise.

For instance, Lodha is offering two-year fixed-rate loans for its projects. By then, income growth will take care of any additional interest burden.

While rising interest rates is likely to have a sentimental impact on the sector in the near term, in a scenario with: 1) higher construction costs and cost of capital and 2) constrained industry growth, larger developers will further consolidate their market share.

We continue to prefer players with an ability to generate robust cash flow over the next three-to-four years and investing in developing their pipeline, which will provide further growth visibility and lead to a re-rating.

We continue to prefer Lodha and Oberoi for the next 12 months.

Upsides are calculated based on the closing price of 24 June.

Macrotech Developers

(Lodha): Buy | LTP Rs 1,010 | Target Rs 1,570 | Upside 55%

Strong pre-sales momentum will ensure healthy cash generation of Rs 50-60 b over the next two-to-three years, leaving ample room for de-leveraging as well as growth opportunities.

The company expects the deal addition momentum to continue in FY23 as it targets to add projects with a cumulative Gross Development Value (GDV) of Rs 150 b.

The management believes the current demand environment is at the start of a structural housing cycle.

Lodha is our top pick for its favorable balance between growth potential, improving financial strength, and compelling valuations.

Oberoi: Buy| LTP Rs 758| Target Rs 1,100| Upside 45%

The management expects the business development to continue as it is looking at a few large redevelopment projects and land parcels outside Mumbai, where the company has entered MoU and will be confirmed once closed.

While the company is optimistic on launching the recently added projects in FY23E, but a renewed focus on business development is a positive sign and it will continue to provide further growth visibility for Oberoi.

(The author is Head – Retail Research,

Limited)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com .)

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After the latest rate hike by the Reserve Bank of India ( RBI ), analysts have now turned sceptical about the real estate sector revival, which has been ailing for quite some time.

A few experts are suggesting investors keep off the rate-sensitive stocks, including real estate, for some time, while several analysts are positive about them thanks to RBI’s announcement and revival in demand.

After analyzing the takeaways from the post earning conferences, interactions with developers and Q4 numbers, brokerage firm Elara Capital expects healthy momentum likely to continue.

“Industry continues to witness a structural positive shift in housing demand, with fundamental demand drivers in place,” it said.

“Large developers with better balance sheets may continue to increase their market shares and continued demand strength, low inventories, gradual price hikes, low-interest rates and conducive government policies are propping industry dynamics.”

Elara believes that the residential sector’s performance is outstanding, whereas the office and retail segments are witnessing a bounce back. Hospitality is also recovering. “Slow-down in the residential segment and high home loan rate are the key risks to the market,” it noted.

The FY22 witnessed leading listed developers posting record presales, aided by a combination of market share gains and launch cycle regaining momentum, said other analysts.

Traction was broad-based across segments, with CY21 witnessing the highest growth traction across sectors, whereas pan-India inventory overhang is also down, said Dolat Capital in a report.

“We expect these levels to keep improving, given supply levers are intact ‐ access to funding largely concentrated in the organized players and the rising cost of construction and land, thus, aiding further industry consolidation,” it added.

“Expect near‐term sector performance to be relatively muted as the market will look for evidence of sales sustaining in a rising interest rate and cost environment,” it added further.

Other analysts see the monetary policy as a blessing in disguise for the real estate sector. The central bank increased the limits for individual housing loans by cooperative banks and permitted rural cooperative banks to lend to commercial real estate.

Yash Gupta, Equity Research Analyst, Angel One, said: “As expected, the repo rate was hiked by 50 bps, but the most important thing for real-estate companies is that the RBI has doubled the limit of loans from co-operative banks.”

This will help the cooperative banks give more housing loans, he added. “We continue with our buy call on

and

.”

Elara Capital is positively biased towards real estate, led by continued momentum in the residential segment, revival in commercial and retail segments and continued market share gain by top developers.

“We reiterate Buy on Sobha Developers,

,

, Oberoi Realty and Accumulate on

,” said Elara Capital.

Dolat Capital is extremely bullish on

and

due to their aggressive expansion mode, large land reserves, and a healthy mix of annuity income. The brokerage is also positive on Oberoi Realty.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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(What’s moving Sensex and Nifty Track latest market news , stock tips and expert advice on ETMarkets . Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

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