Real Estate Q1FY24 update: Off to a strong start

21 Jul 2023 , 10:55 AM

Listed developers have reported Q1 pre-sales growth of 23% YoY so far, inline with 15-20% guided for FY24. Business development is also off to a strong start, with some reporting GDV addition of 4-5x of Q1 pre-sales. However, office leasing was muted, analysts of IIFL Capital Services believe this is driven by overall weak global demand and particularly for listed players due to weak SEZ leasing. Valuations are not cheap (9% above NAV); supportive policy environment and strong operational performance have led to real estate stocks meaningfully outperform the broader markets over the last six months. Reiterate DLF and BRGD as top picks.

Listed developers – Strong performance vs flattish industry growth: 

Q1FY24 Operational updates from listed developers suggest a strong start to FY24. Developers under coverage – LODHA/SOBHA/PEPL have reported 17-30% YoY growth in pre-sales, this is in line with the 15- 20% growth guided for FY24. Other prominent developers like RUSTOMJE (+106% YoY)/PURVA (+119% YoY)/KPDL (+58% YoY) reported amongst their best ever quarterly pre-sales performances. Overall, analysts of IIFL Capital Services expect top 12 developers to report 21% YoY growth in pre-sales for Q1FY24. Their interaction with developers suggest they maintain their bullish outlook for FY24, guiding 15-20% YoY growth in pre-sales for FY24, largely be driven by higher launches (guidance of >20% growth YoY). However, in analysts of IIFL Capital Services estimates analysts of IIFL Capital Services build a muted 5-10% growth in pre-sales, given high base and large dependence on new launches which are skewed towards H2 of the year.

For the top 8 cities of India, data from Knight Frank suggests demand at the Industry level has been muted for Q1FY24, down 3% YoY, implying strong consolidation and market share gains in favour of top developers. Property registration nos also indicate overall markets (including secondary sales) are also flattish YoY; Mumbai Property registrations came in at 10,319 units for June’23, up 5% MoM/ 4% YoY, however down 3% YoY for Q1FY24. Maharashtra registrations were up 5% YoY for Q1FY24.

Business development activity re-inforces developer’s bullishness on growth: 

Q1FY24 has been exceptionally strong from business development front, GDV addition reported by LODHA/GPL is 69%/42% of their annual guidance respectively and 3.6x of Q1 pre-sales for LODHA; also RUSTOMJE/KPDL have reported GDV addition for Rs25bn each, against pre-sales of Rs5/7bn respectively. Overall, developers guided to a GDV addition 30% higher than FY24 pre-sales indicating strong growth outlook.

Commercial – Q1FY24 leasing muted: 

Net absorption for Q1FY24, according to data from Cushman and Wakefield (C&W), came in at 6.1msf (-41% YoY, -27% QoQ). Demand was driven mainly by NCR, Hyderabad & Pune; which accounted for 76% of the overall leasing. Gross leasing however fared better at 17.4msf (-25% YoY/ +10% QoQ). Analysts of IIFL Capital Services believe this is partly linked to slowdown in hiring and continuing hybrid model driving recalibration of space requirements. Further, SEZ leasing has been weak all along, with SEZ amendment not in near sight, analysts of IIFL Capital Services expect leasing to be muted.

Reiterate DLF and BRGD as top picks: 

The sector trades at 9% premium to NAV (vs average premium of 6%), over past 6 months the realty Index has outperformed the broader index by 15% aided by the RBI rate pause. Analysts of IIFL Capital Services prefer developers with high operating cashflow margins and low leverage levels to be better-placed; prefer DLF and BRGD. Within the REITs space, valuations continue to remain attractive (EMBASSY/MINDSPCE at 28%/17% discount to NAV), but analysts of IIFL Capital Services see nearterm challenges to distribution growth, driven by higher interest rates.