Residential demand upbeat despite rise in construction cost, interest rate, says brokerage; picks DLF, Oberoi Realty among top 4 bets

Though rising interest rates globally, including India, and spike in construction cost has raised concerns on residential demand, however, brokerage house ICICI Securities remains bullish on realty sector.  

It was of the view that even if that mortgage rates may rise by another 75-100bps over the remainder of FY23E (up to March 2023), the developers would look to provide incentives such as builder subvention for a limited period of 2-3 years. 

As for construction cost, leading developers have been able to pass on this initial round of price hikes to customers in ongoing projects, it said. 

As per the brokerage, the developers, under its coverage, have already taken into account these factors. "While these concerns are justified, we are of the view that developers in our listed coverage universe have already anticipated these concerns based on past cycles and are now pursuing a path of calibrated growth while keeping balance sheets healthy," said ICICI Securities.  

What makes brokerage bullish on the sector?  

The bullishness of the brokerage was largely based on reduction in debt and price hike in projects.  

"On an aggregate basis, listed developers in our coverage universe (ex-REITs) have been able to bring down their consolidated net debt levels by 45% between Q4FY20-Q4FY22 (Mar’20 to Mar’22). Besides, most of the leading developers have already hiked prices by 3-8% across projects to mitigate cost push inflation in March-April 22'," the brokerage underlined.  

FY22 industry volumes back to FY20 levels  

Citing Liases Foras, a Mumbai-based residential real estate, it said even after a second Covid wave in April’21 which impacted Q1FY22 sales volumes, residential sales for the remainder of FY22 have continuously risen from Q2FY22 onwards.  

At 39,575 residential units in FY 22 against 23,714 in FY 21, Bengaluru with nearly 67% growth YoY  led the recovery in sales volume.

It was followed by the Southern markets of Chennai and Hyderabad along with Pune with pockets of MMR and NCR also seeing strong volumes. 

As per ICICI Securities, overall FY22 sales volumes across India’s eight Tier I cities grew by 41% YoY to around 269,400 units which is at par with FY20 sales volumes.  

Realty stocks to buy 

Based on its research, the brokerage shortlisted DLF, Oberoi Realty, Macrotech (Lodha) and Brigade Enterprises as its preferred picks. 

DLF clocked residential sales bookings of Rs72.7bn in FY22 vs. Rs30.8bn in FY21. For FY22 overall, Oberoi Realty clocked sales bookings worth Rs38.7bn vs. Rs34.3bn in FY21 with the sales momentum in both years being driven by new tower launches at the Elysian phase in Goregaon. 

Similarly, Macrotech (Lodha) registered Q4FY22 India business sales bookings worth Rs34.6bn (up 37% YoY and 33% QoQ), it's highest quarterly sales booking clocked by the company till date and Brigade Enterprises recorded sales bookings of 1.5msf worth Rs10.3bn owing to new launches of 1.9msf (BRGD share at 1.1msf) during the quarter across Bengaluru and Hyderabad.