Q3FY23 Real Estate- Residential review: Set for another year of strong growth

21 Feb 2023 , 10:51 AM

Listed developers reported another robust quarter of pre-sales in Q3. Current momentum suggests at least ~25% YoY growth for FY23, on the back of almost 50% YoY increase witnessed in FY22 pre-sales. While some developers have indicated constriction in demand for the Affordable segment due to high mortgage rates, the Mid-income and Luxury segment sales have remained largely unaffected so far. Price hikes have been modest. Despite strong operating performance, Real Estate stocks have underperformed broader markets by 15% over last one year.

Q3 operating performance robust:

Developers continued to report strong operating nos – while the headline pre-sales growth was soft at 4.2/3.9% YoY/QoQ; adjusted for the sharp decline witnessed by PEPL and OBER, the listed developers reported growth of 41%/20% YoY/ QoQ. Most developers witnessed strong continued sales across projects, even with modest price hikes being implemented to pass on the rising input costs

Improvement in reported profitability to be steady, but gradual:

Revenue recognition for coverage universe improved sequentially, driven by higher completions during the quarter. Reported revenues were up 8% YoY/24% QoQ. Other than OBER, developers report revenues on a completed project basis (post receipt of OC), leading to significant lag vs pre-sales/collections and more quarterly lumpiness.

FY23 pre-sales growth on track for ~25% YoY growth:

Pre-sales for M9FY23 is up 41% YoY. Developers continue to be bullish on the outlook and are on track to deliver ~25% YoY growth for FY23, despite a high base for FY22 (+50% YoY). Q4 is typically the strongest quarter for listed developers; companies like BRGD have guided to reporting their best-ever quarterly performance in Q4.

Strong BD focus to support growth:

Q3 has been one of the strongest quarters for business development (BD) for developers under coverage; especially for companies like GPL/LODHA, which have added GDV of ~Rs200bn/Rs85bn during the quarter. SOBHA/OBER are now focusing back on BD; OBER is expected to announce a large deal in NCR. Most developers are open to doing a mix of JD and outright deals.

Mortgage rates weighed on affordability; developers not worried as yet:

Developers continue to suggest that while there has been some demand weakness observed in the Affordable segment, listed developers have not seen an impact on footfalls/enquiries so far. Analysts at IIFL Capital Services believe Developers with a deep pipeline from well-located land bank, healthy margins and low leverage are the best placed.

Analysts at IIFL Capital Services top picks are DLFU, BRGD and LODHA