Ambit Is Watchful Of Elevated Real Estate Valuations But Others Disagree

While a growing economy and infrastructure push a driving record sales for larger developers, Ambit Capital Pvt. is advising investors to remain watchful of elevated valuations.

The current valuations, at around 40% premium to the five-year average for top eight players, seem to factor in continued market share gains for organised developers over the next five to 10 years, the brokerage said in a note.

The caution from Ambit is contrary to market expectations of further rerating as India enters the festive period considered auspicious for buying. Demand for the real estate sector, which turned around during the pandemic, hit a record Rs 68,200 crore in pre-sales in FY23 for the top nine listed developers, as per Ambit.

Valuations for large developers including DLF Ltd., Godrej Properties Ltd. and Oberoi Realty Ltd. have rerated the most over the period.

Most real estate stocks are trading on a par or premium to their net asset value on the back of pre-sales growth and working capital, said Parvez Qazi, executive director at Nuvama Institutional Equities, told BQ Prime. "Debt for the industry is at an all-time low, which is happening despite companies' investment in new business development.”

Valuations can't be termed "expensive because the operational performances have also been best in the last decade," Qazi said. "Investor outlook is reasonable. If performance is good, valuations also move up and currently, they are reasonable as in line with operational performances.”

Parikshit Kandpal, analyst-institutional research, HDFC Securities, said some stocks have had a decent run-up so the upside seems to be limited. "But, with expectations of a better second half, and launches planned in Q3, we can see some upgrades coming for the sector.”

Comparing cross-cycle valuations would not be the right metric as the last few years have been bad and now the sector is entering an upcycle, according to Kandpal. "Drivers have also changed like interest rates, affordability. The metrics would be on the growth on presale will continue after such a big leg up in FY23."

Ambit, too, agrees that rerating of mid-cap real estate stocks after Covid came when these names started posting record sales numbers. And despite a sharp increase in interest rates in the past year, "there seems to be no slowdown in real estate as most companies continue to post record numbers".

A few large regional developers such as Macrotech Developers Ltd., DLF Ltd., Prestige Estates Projects Ltd. are now building scale in non-core micro-markets to gain scale and de-risk the core micro-market, according to Ambit.

Things To Watch

While most developers remain gung-ho about sector upcycle, Ambit said land price inflation remains a key monitorable. The brokerage prefers residential real estate over commercial properties, while also monitoring the increasing corporatisation of the sector.

Ambit prefers Prestige Estates Ltd., Brigade Enterprises Ltd., and Oberoi Realty Ltd. within its coverage with a 'buy' rating on all three. While Godrej Properties' performance improved in second half of FY23, the first-quarter of FY24 disappointed, he said.

The outlook for large organised developers across micro-markets remains positive, driving better-than-industry sales, Kandpal said. The positives outweigh the negatives but a substantial increase in pricing could "derail the cycle".