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The Real Estate Rally

The Real Estate Rally

This week we talk about the resurgent real estate sector and why all of a sudden everyone is so upbeat about the industry.


Real Estate

The Story

Realty stocks have been selling like hot potatoes of late. NSE Realty Index, a constituent of listed real estate companies, hit an 11-year high recently. And share prices of several listed real estate companies are at their decadal peaks. It’s crazy to think that it’s happening right now and while some would look at this and say — “Well, didn’t Sensex just breach 60,000? Aren’t all stocks zooming like there’s no tomorrow?”

There is a case to be made that the real estate story may still have some legs even if you discount the broader market rally.

But first, let’s talk about the troubles. During the first quarter of FY21 (Apr’20-June’20), top real estate companies like Macrotech Developers (Lodha), Godrej Properties, DLF, Oberoi Realty, and many others saw their revenue being wiped out by as much as 50–80%. Even worse, they were in the red as losses began to mount. And although prospects did start improving after the lockdowns began to ease, residential sales in the top eight cities were still down 50% during the first half (April’20 to Sept’20) of FY21 as compared to the same period a year ago.

But this was the least of their problems. The whole sector has been in the gutter for a while now and you can trace it back to the 2004–08 era when GDP growth was constantly surging at 9–10% every year. In a bid to exploit the growth opportunities available, Real Estate developers launched new projects worth lakhs of crores setting off the biggest investment boom in the country’s history. But then in 2008, the Global Financial Crisis (GFC) threatened to ravage the entire world economy.

India, however, emerged out of the GFC relatively unscathed. But growth rates moderated. The most affected were real estate companies who had overstretched themselves after having borrowed large sums of money to commission expensive projects.

When the homes didn’t sell, some companies began throwing in the towel. Even others were operating on life support. But then a slew of unfavourable Regulations including the Black Money Act, Demonetisation, and GST, pushed the real estate Industry to the brink of collapse. Many (including us) were predicting a sharp revision of prices across the country.

But that didn’t happen. Instead, we saw some moderation of prices, a few bankruptcies and some markets (like NCR) take a brunt of the burden. All in all, the real estate sector still managed to survive. Even Covid couldn’t precipitate a total meltdown. If anything, the real estate sector in this country is remarkably resilient. And by the end of 2020, there was some good news finally.

Take for instance Maharashtra. Around August 2020, the state government decided to cut stamp duty on property sales. And while you may be inclined to think that a cut in stamp duty wouldn’t make a lot of difference, that’s not entirely accurate. When you are talking about high-value transactions even a percentage difference may results in savings to the tune of lakhs. So there was a lot of renewed interest from homebuyers at least until March 2021 (the last month during which the cut in stamp duty was in force). Even the Karnataka government has followed suit by cutting stamp duty for home purchases that cost less than 45 lakhs.

Then there’s the fact that interest rates are pretty low these days thanks to intervention from the RBI. And demand is on the up. Since Covid has precipitated a work-from-home culture, many people now seem to think that there’s merit in owning a home. In the first half of 2021 alone (Jan to Jun 2021), overall residential sales in the country shot up by 71% as compared to the same period last year.

And granted that last year was an anomaly by all accounts. But it’s still crazy to think that the real estate sector has been thriving during a period marred by disease and lockdowns. In fact, the current environment is so euphoric that Godrej Properties sold homes worth 575 crores in Noida in just a single day — making it one of the most successful real-estate launches in the country.

So yeah there’s considerable optimism that the sector may be finally turning a corner and hopefully, this story offers you a glimpse into this narrative.

Until next time…

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Understanding the Zee-Sony Marriage

Also, in this week’s Finshots we talked about the unexpected union between Zee Entertainment and Sony Pictures India. And if you want a simple explainer on how this all came about don’t forget to check out the full story.

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