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Real Estate Industry Analysis
Must know facts:
- The real estate sector comprises four sub sectors – housing, retail, hospitality, and commercial.
- The average returns on Indian residential real estate over the past 5 years have been 12-14% (absolute), but, of course, more granular returns are very city- and micro-market specific.
- Real estate is a heterogeneous product and returns depends on various aspects such as location, construction, economic scenario.
- Rapid growth in services sectors: IT/ITeS, BFSI & Telecom, Rising demand from MNCs, Demand for office space in Tier 2 cities.
- Mumbai, NCR & Bengaluru account for 60 per cent of total office space demand in India as of 2017.
Influencing Factors for price change:
- Individual Stocks in real estate sector as best judged when benchmarked against – ‘NIFTY REALTY’, ‘S&P BSE REALTY’ indices.
- Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. So reliable numbers from trusted research companies that indicates upward traction in real estate demand, is a key price driver.
- Choosing listed stocks of premium builders with proven management experience, who has exposure in catering to medium size residential segment of the real estate is the key, that is where the demand continues to grow. Portfolio’s of builders with right mix of residential construction space, office leasing & rentals certainly holds top notch priority in stock picking.
- Choosing the right mix of builders with completed projects, expecting sales to turn around vs builders who have newer projects under their belt catering to new age requirements is important.
- One should also have right stock mix while you include stocks into your portfolio – right mix of listed housing finance companies vs listed builders to whom they offer housing loans.
- Governments efforts to boost affordable housing & other smart city projects are key price drivers.
Understanding the Industry:
The year 2017 as we all know has set a new benchmark for the Indian real estate sector. The implementation of demonetisation in November 2016 had the entire economy reeling until the first quarter of 2017 and the realty segment was not pardoned either, with land sales reaching stagnation due to more involvement of cash transactions. However, this eventually helped reduce land prices thereby making the end products more affordable to the consumers.
By April 2017, when the markets were looking to stabilise, RERA and GST were announced in succession which again caused some inertia due to confusion among buyers and developers alike, with both awaiting the final set of RERA notifications/legislation from their respective state regulatory bodies.
As per Indian Brand Equity Foundation the growth of real estate sector is well complemented by the growth of the corporate environment. It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.
India’s rank in the Global House Price Index has jumped 13* spots to reach the ninth position among 55 international markets, on the back of increasing prices in mainstream residential sector.
Estimated Market Size:
The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP).
In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India’s growing needs.
Post implementation of RERA & GST reforms, the following impacts have been observed in the market so far with more demand for 2 BHK & 3 BHK segment – apparent by a steady surge in site visits. Preference for ready to move-in properties that are hassle-free of any compliance issues. Willingness to pay a premium for long-standing reputed developers.
Yes having said all of the above – Real estate will probably give sedate returns of 5-8% CAGR (compounded annual growth rate) and not the 15-20% during 2004-09. So it makes to have sensible expectation even while you choose to invest in real estate companies & your valuation criteria for stock selection. Choosing listed stocks of premium builders with proven management experience, who has exposure in catering to medium size residential segment of the real estate is the key, that is where the demand continues to grow. Portfolio’s of builder with right mix of residential construction space, office leasing & rentals certainly holds top notch priority in stock picking.
Top Stocks in the industry:
DLF, Oberoi realty, HUDCO, Prestige Estate, Indiabulls Real, Sobha, Brigade Ent, Puravankara & many more.
(Please note above stocks are not recommendations, they are purely for information purpose only)
Information Source / References: IBEF, Livemint, BusinessToday,The Economic Survey 2016–17 & 17/18, Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and Industry, Union Budget 2017–18, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases, Media Reports,
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