Real estate stocks have created a lot of buzz and excitement among investors, with many stocks having risen up to 100 per cent so far this year.
If that has left you itching to take positions in the realty sector, sit up and take note.
For, this huge performance has come on a low base, which makes the returns look impressive. In fact, all the stocks from the BSE Realty index are still trading far below their all-time high levels.
Many market experts have a word caution on the sector.
Realty majors such as Unitech, HDIL, DLF, Indiabulls Real Estate, Omaxe and Sobha — which have outpaced the benchmark indices this year — are still down 99 per cent, 92 per cent, 84 per cent, 80 per cent, 66 per cent and 65 per cent, respectively, from their record high levels.
That, when shares of Indiabulls Real Estate, DLF and Godrej Properties are up 139 per cent, 77 per cent and 76 per cent, respectively, on a year-to-date basis.
Other stocks from the BSE Realty index have climbed between 12 per cent to 67 per cent during the same period.
“When you come down from Rs 100 to Rs 10, it is a drop of 90 per cent, and then you climb from Rs 10 to Rs 20, it is a gain of 100 per cent. But you are still down 80 per cent from the top. Something similar is happening on the real estate counter,” Nilesh Shah, Managing Director, Kotak Mutual Fund, told ETNow in a chat.
Shah said all these stocks are bouncing from their bottom after they had fallen a lot. In percentage terms, they seem to be delivering great returns but majority of real estate investors have not entered at current price levels; they had entered at much higher price levels.
Shah said the real estate sector has to do a lot in terms of corporate governance to gain shareholder confidence.
“It would be far better to play building materials, housing finance and ancillary industries rather than pureplay real estate companies,” he said.
Real estate stocks are in the limelight this month after the much-awaited Real Estate Regulation Act (RERA) came into force on May 1, although only 13 states and UTs have so far notified the rules.
Some analysts warned that investors should not get duped by the recent rally in the real estate stock. Rating agency India Ratings and Research has maintained a negative outlook for the real estate sector in FY18, based on expectation of continued slump in the residential space.
“This will result in continued negative cash flow and a further increase in the already high debt levels, resulting in weakening of credit profile of the sector,” Ind-Ra said.
On RERA and its impact on real estate stocks, Deven Choksey, Managing Director of KRChoksey Investment Managers, said the risk taking ability has now improved, because the real estate sector is coming under the regulatory framework, which is RERA, and some of the local companies could now become pan-India players.
“That is where you are buying stocks at relatively inexpensive valuations in some of the cases. When the regulator comes into operation, the industry will gain a bigger size and those companies which have proven themselves in a particular area could possibly become pan-Indian player. I think housing demand is expected to increase manifold and that is why there is a demand for quality realty companies in the market at this point of time,” Choksey said in an interview with ETNow.