Tipping point for realty sector: Room for double-digit growth in FY23

Price hikes, market-share gains have helped beat cost pressures, gain volumes

Multiple headwinds in the near term notwithstanding, larger listed real estate developers could deliver double-digit growth in 2022-23 (FY23), given the strong sales momentum, market-share consolidation, launch pipeline, and lower leverage.

The top 10 listed developers have highlighted this at the end of a record January-March quarter, powered by the highest-ever bookings and improving collections.

Highlighting the significant sales uptick, Rupesh Sankhe, vice-president and power analyst, Elara Securities, says the 42 per cent year-on-year (YoY) growth in 2021-22 (FY22) happened regardless of the Delta and Omicron variants of the novel coronavirus, Russia-Ukraine war-led inflation spike, and real threat of rising interest rates.

While there was a 5-7 per cent increase in prices by real estate players to take the edge off cost inflation, rising income levels, low interest rates, and favourable demographics ensured strong affordability/volumes, he adds.

After a 36 per cent increase in launches in FY22 to 45 million square feet (msf), top developers are looking at scaling this up to 70 msf in the current financial year (FY23), translating into a rise of 55 per cent.

Given a strong base, launches, rising construction costs, and interest rates, there were concerns over whether the combined impact would derail the strong sales growth and the real estate rally. 

But analysts don’t seem overtly worried.

Motilal Oswal Securities (MOSL) believes the impact may not be palpable. “Construction costs grew 12-15 per cent on a headline basis, leading to a marginal impact of not more than 3-6 per cent. Companies, on average, have raised prices by 5-8 per cent and mitigated a large part of the cost increase,” say Pritesh Seth and Sourabh Gilda of the brokerage.

Further, steel prices have fallen 15 per cent from their peak, which will cushion the cost and margin pressures on larger realty players. While a sub-8 per cent mortgage is unlikely to have any impact, any move beyond this could push out demand for a few more quarters, they add.

They prefer players possessing the ability to generate robust cashflow over the next three to four years and invest in developing their pipeline, leading to further growth visibility and a rerating of their stocks.

MOSL’s top picks are Macrotech Developers (formerly known as Lodha Developers) and Oberoi Realty. 

It has a ‘neutral’ rating on Godrej Properties and DLF.

Another worry for the Street is the increased number of launches and rising supply. These could have a pronounced bearing on prices.

Kotak Securities, in a recent report, pointed out that the worries on supply glut in the Mumbai market, given the large premium payments of ~11,000 crore (equivalent to 118 msf of launches) for nine months of FY22, may be misplaced.

These include amounts paid for projects already launched/under construction and premiums paid for other project developments, such as office, retail, and hotels. Moreover, the data since January does not show significant change in launches, with sales of 17.5 msf up to April exceeding launches of 13 msf.

Multiple headwinds and price increases notwithstanding, the market share of listed developers has crossed 20 per cent, aided by recovery and sales growth last year. The pre-pandemic (2019-20) share of companies was in the 14-15-per cent range, according to real estate services company Anarock.

While higher cost of construction and interest rates are likely to weigh on industry demand for FY23, these could accelerate consolidation (consequently increase market share) for larger listed players, say Mohit Agrawal and Saatvik Shetty of IIFL Research.

Given the impact of rising construction cost and interest rates, IIFL analysts prefer developers with a higher share of finished/near-completion and unsold inventory, increased operating cashflow, margins, and low leverage.

DLF and Macrotech are best placed in FY23, with a deep pipeline from an owned, low-cost and well-located land bank. While they retain a ‘buy’ on Brigade Enterprises and ‘add’ on Sobha, rich valuations of Godrej Properties and Oberoi Realty have led them to maintain a ‘reduce’ rating.