A dramatic cooling off in Indian real estate stocks is spurring some investors and analysts to hunt for chances to selectively buy shares.
The excitement over India's expansion that had made property one of the hottest equity sectors over the past couple of years has faded amid broader risk-off trading as economic growth slows. Bulls are seeing this a possible chance to buy, with the long-term positive story remaining intact.
“India is fundamentally still in a real estate upcycle,” according to Mohit Agrawal, an analyst at IIFL Capital Ltd. The selloff is providing an opportunity to build positions in some stocks, he said, adding that the lower valuations sets them up for another rally “as and when market sentiment turns positive.”
The NSE Nifty Realty Index is down 20% so far in January, on course for its worst monthly underperformance versus the broader benchmark in 14 years. That's brought the property gauge's forward price-to-earnings ratio back down to 32 times, compared with its three-year average of 37 times.
Demand for luxury properties has grown from an emerging class of wealthy Indians. Despite higher interest rates and the macro slowdown, real estate firms including DLF Ltd. and Macrotech Developers Ltd. reported better-than-expected profits for the December-ended quarter.
Battered share prices leave a lot of room for upside. Even with sell-side expectations recently pared slightly, the average analyst target for the Nifty Realty gauge calls for a 41% gain over the next 12 months.
Companies have launched many new projects and initial buyer commitments have been solid, according to Nikhil Rungta, co-chief investment officer at LIC Mutual Fund.
“The opportunity in real estate is still very much alive,” he said. Rungta said he holds shares of some property companies and is in wait-and-see mode to add more.
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