Medium term outlook for Realty sector remains positive

HDFC Securities Institutional Equities’ Research Analyst (Strategy), Aryan Singh Dalal, shares his views on the Realty sector.

 Housing sales in major cities came down sharply in the June quarter. What is your outlook for the sector over the next one year?

The June quarter saw a notable decline in housing sales across major cities, attributed to multiple factors including record-high property prices, delayed project launches in the Mumbai Metropolitan Region (MMR) due to NGT-related clearances, and typical seasonal sluggishness. Underlying demand continues to be supported by structural drivers such as rapid urbanization, the growing preference for nuclear families, and increasing upgradation demand from middle- and upper-income segments. The upcoming RBI rate cut cycle, expected to commence in late 2024 or early 2025, should provide further impetus by improving affordability and reviving buyer sentiment. While the market may take another quarter to regain momentum, the medium-term outlook remains decidedly positive. Leading developers are likely to report double-digit presales growth in the coming years, with the current slowdown representing a temporary consolidation rather than a sustained downturn. The residential real estate market is consequently poised for a strong performance cycle, with the present challenges creating opportunities for more measured, sustainable growth ahead.

Property prices are at record highs. Do you see any risk of property prices crashing in India in the near term?

Despite property prices reaching record highs, the risk of a major crash in India’s real estate market remains low in the near term. Unlike the pre-2010 period, which saw speculative bubbles, the current market is largely driven by end-user demand, reducing the likelihood of a sudden collapse. High construction costs—including land, materials, and labor—also act as a floor for prices. However, certain overpriced micro-markets, particularly in the luxury segments of cities like Mumbai and Bengaluru, could experience price consolidation if demand weakens further. Overall, while a crash is unlikely, some markets may see stagnation or minor price adjustments.

 To what extent the interest rate cuts of RBI will benefit the real estate sector?

Interest rate cuts by the RBI, are likely to provide a much-needed boost to the real estate sector. Lower home loan EMIs will improve affordability, encouraging more buyers to enter the market. The psychological impact of rate cuts could also revive buyer sentiment, which has been subdued due to high borrowing costs. Additionally, reduced interest rates will lower developers’ financing expenses, helping them complete projects faster.

Realty stocks are currently trading at an average P/E ratio of around 48. What is your view on that?

Unlike most industries where earnings reflect recent performance, realty companies recognize revenues with a significant lag – typically 2-3 years after sales are booked, as construction progresses. This accounting peculiarity means today’s earnings actually represent projects sold during 3-4years ago, when sales volumes were recovering. The market’s premium valuation reflects forward-looking optimism about: 1) The strong presales growth visible over the past 12-18 months, 2) Improving execution capabilities of branded developers 3)Structural demand shift towards organized players.

However, investors should focus more on : 1) Presales velocity (current quarter sales bookings), 2) Collections ratio (cash flow visibility), 3) Debt profile and land bank quality

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Source : HDFC Securities Institutional Equities