Real estate shares weak; Godrej Properties, DLF, Mahindra Life shed 3% each

Godrej Properties, DLF and Mahindra Lifespace Developers were down 3 per cent, while Macrotech Developers (Lodha), Sobha, Oberoi Realty, Indiabulls Real Estate and Prestige Estates fell 1-2 per cent

Shares of real estate companies were trading weak with the S&P BSE Realty index falling nearly 2 per cent on the BSE in Wednesday’s intra-day trade on concerns of rising interest rates and fears of a recession globally. 

At 12:54 pm; the S&P BSE Realty index was down 1.9 per cent as compared to a 1.1 per cent decline in the S&P BSE Sensex. Godrej Properties, DLF and Mahindra Lifespace Developers were down 3 per cent, while Macrotech Developers (Lodha), Sobha, Oberoi Realty, Indiabulls Real Estate and Prestige Estates Projects slipped 1 to 2 per cent, at the time of writing this report. 

In the October-December quarter (Q3FY23), real estate industry witnessed a steady performance in residential sales momentum. While QoQ volumes dipped for Mumbai players like Oberoi, Bengaluru based firms like Sobha and Brigade showed strong sales volume traction with former benefitting from NCC subsequent phase launch.

Further, commentary suggests the industry has not witnessed any major impact of recent interest rate hike on housing demand so far. The rental portfolio remained steady on the office front while hospitality segment benefitted from strong ARRs and healthy occupancy, ICICI Securities said in an earnings wrap.

Sriram Khattar, Managing Director, Rental Business of DLF said in Q3FY23 conference call that the indications were quite strong in the month of October. But thereafter, the US recession fears and continuous hardening of interest rates has dampened the sentiment marginally.

"This has dampened the sentiment in terms of the decision makers wanting to defer their decision by a few weeks or months before the situation in the US becomes clearer", Khattar said.

However, the retail business continues to exhibit healthy growth. Consumption trends continue to reflect sustained momentum with sales delivering consistent growth leading to a healthy retail business outlook, said Vivek Anand, CFO, DLF group.

Meanwhile, according to analysts at Nuvama Wealth Management, healthy demand is leading to improving profitability for realty developers (35 per cent cash operating surplus during 9MFY23 compared with 31 per cent during FY22).

"With improving cash flows (refer Cash flow generation improving), realty developers have brought down debt levels, enabling them to save on interest costs (which were 7.5 per cent of collections on an average during 9mFY23 compared with 10 per cent during FY22) despite rising interest rates. They have also stepped up capex on business development (19 per cent of the collections during 9mFY23 compared with 12 per cent during FY22)," they said in a real estate sector update.

While higher interest rates are a worry, the brokerage believes realty stocks are attractive from a medium-term perspective, considering rising consolidation. Companies with sizeable land banks and robust cash flows such as DLF and Macrotech may re-rate going ahead, it added.