HDFC Securities’ Parikshit Khandpal on what is driving demand in the real estate sector 

Over the last year, the real estate segment has seen a boom, especially in the premium and luxury segments. The Nifty Realty Index has gained over 55 percent on a year-to-date (YTD) basis, with most players seeing a healthy uptick in stock prices that is expected to continue shortly. In a conversation with Moneycontrol, Parikshit Khandpal, VP – of Institutional Research, at HDFC Securities, spoke about the driving factors behind the recent rally.

Edited excerpts:

What’s driving this rally in real estate stocks? 

Most listed real estate companies are sitting on a new high in terms of sales, pricing, and launches. The momentum has picked up and volumes have multiplied. Going forward, the expectation is that pricing and significantly higher volumes will drive up cash flows — and the stock market is pricing that in.

Furthermore, real estate companies are spreading their wings in India to expand the total addressable market. Southern players are venturing north, and companies like DLF, traditionally Gurgaon-based, are making inroads into Mumbai. The market is becoming more organised, and growing. Market share growth for companies will come from expansion into new geographies.

The balance sheet of real estate firms has significantly improved, and they do not need access to banking channels or NBFCs for funding, because the sales momentum is so high that they are getting customer advances at 0 percent interest. Which is like raising debt at 0   percent. This debt is a liability for them until the flats get delivered or the occupancy certificate comes in. Hence, because of the momentum in sales, the cash flow from customer advances is sufficient to fund the construction.

Also read: Boom in luxury keeps real estate stocks on top. Can the rally sustain?

What’s causing this surge in demand? 

Macro factors play a significant role in real estate rallies. Primarily, continuity in pro-growth government policies and sentiment-driven house buying are the key drivers of this rally. Confidence in purchasing real estate is bolstered by job security, rising wealth from the stock market, and other factors, like the wealth created in the start-up world. That’s why we see demand in the premium real estate segment. This segment is largely insulated from interest rates because both buyers and investors have their wealth and investments in other asset classes like gold, stock markets, and ventures, which they are now using to buy real estate.

Do you see real estate prices going up  further? 

Approximately 50–60 percent of sales happen at equilibrium prices during launch, with a 20-30 percent price hike close to project completion. Current prices are within the comfort zone, meaning they’re just right to absorb the supply coming in. The supply is being driven by real estate players acquiring prime land parcels and/or forging joint development projects with local land-owners or small-time realtors, who find it difficult to sell on their own.

Joint developments work well for leading players as they get to charge a premium on the land because of their brand pull, and can also scale without taking on the risk of making high payouts for acquiring land, as used to be the case. It works for small relators too, because they can get a revenue share without taking on the risk of developing a project. This win-win arrangement is what is contributing to higher sales.

Also read: Morgan Stanley expects real-estate upcycle to continue, raises price target of these 5 stocks

On the contrary, in projects outside city centres, which cater to those seeking affordable housing, inflationary pressures have resulted in lower disposable incomes and savings, and given the high construction costs, developers have very thin margins. This does not leave enough room to trigger a big growth in volume at prices profitable enough for the builders.

The luxury and high-end segments remain resilient to such challenges, driving sustained growth. But in future, the overall price growth could be slightly below inflation, promoting affordability and fostering a volume-driven upcycle.

When do you see the affordable segment picking up pace? 

Increased wealth is leading to sustained demand for larger houses and gated community living, but as I said, so far we have seen momentum only in the luxury segment. While demand for affordable housing is deemed to be 10–15  better than the average of the last two decades, it will still take time for demand to pick up in this segment as it is driven by mortgages and thus impacted by interest rates.

Government concessions for affordable housing, tax rebates, and zero taxation on profits from affordable housing projects may help boost supply (and demand) in this segment.

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