India a bright spot in shaky global realty market but may see pushback if home loan rates cross 9.5%: CLSA

The foreign brokerage firm is bullish on DLF, Prestige and Sobha, which are focused on NCR and Bengaluru residential markets

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High interest rates and inflation are hurting the global property boom but India remains a bright spot.

Despite a rise in mortgage rates and property prices, housing demand remains steady in India, according to foreign brokerage firm CLSA’s channel checks.

“Most developers and property brokers indicated footfalls and conversion remain steady despite a 150 basis points increase in mortgage rates over the past six months and a 6 percent increase in property prices over the past 12 months,” CLSA said in a recent report.

To fight inflation, the Reserve Bank of India has increased its benchmark repo rate by 190 basis points since May. As a result, home loan rates also rose but banks are now slashing them to sustain the strong demand momentum.

Housing Development Finance Corporation, State Bank of India, Bank of Baroda and Bank of Maharashtra have cut rates on home loans by 15-30 basis points since October.

Demand should remain resilient up to mortgage rates of 9.5 percent but beyond that, there could be pushback from buyers, believes CLSA. Currently, mortgage rates are at 8.5 percent.

The global picture

While India stands out, the global picture looks gloomy. According to the investment banking firm UBS, housing prices in several cities are “out of sync” with rising interest rates. Toronto, Frankfurt, Zurich, Munich, Hong Kong, Vancouver and Amsterdam are in the bubble risk zone now, it added.

In Hong Kong, property prices have fallen 13 percent since the August 2021 peak. According to reports, the slump is now affecting the city’s luxury home sales, which are the lowest in nine years.

Also Read: Mumbai’s housing affordability likely to slip in 2023; Kolkata to remain most reasonable: JLL

In China, Covid-19 lockdowns and weak demand are major obstacles to a turnaround in the property market. The reopening of equity financing for Chinese developers reduces liquidity risk for them but does not indicate an up-cycle in the real estate sector, noted CLSA.

In South Korea, housing prices fell at the sharpest pace in at least 19 years in October. As per Korea Real Estate Board, the index for apartment transaction prices dropped 7.13 percent in the January-September period.

In Australia, people who took out big mortgages are demanding the resignation of the central bank’s Governor Philip Lowe. Lowe had insisted that interest rates would stay low until 2024 but the Reserve Bank of Australia has hiked them for seven consecutive months now, burning a hole in mortgagers’ pockets.

Stocks to watch out for in India

CLSA likes the residential markets of the National Capital Region (NCR) and Bengaluru, thus its top picks are DLF, Prestige Estates and Sobha with target prices of Rs 396, Rs 460 and Rs 620, respectively.

It also notes that mall rentals are up 15 percent post-pandemic as there is 95 percent occupancy in Grade A malls. Retailers, too, are expanding, with more online brands like Mamaearth and Nykaa launching brick-and-mortar stores.

As a proxy play on consumption, the brokerage firm has an “outperform” rating on Phoenix Mills with a target price of Rs 1,444.

Also Read: Will REITs make a comeback after COVID-19?

Christopher Wood, global head of equity strategy at Jefferies, also continues to bet big on India’s hot property market. The Greed & Fear team has observed that rising interest rates are not stalling recovery in the real estate space.

In his India long-only portfolio, Wood recently increased the weightage of Macrotech Developers and DLF while cutting investments in Godrej Properties and Century Textiles.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.???