Realty stocks have rallied hard in recent years: Are they still worth a look? | Smart Stocks News
Investors in real estate stocks have not had it so good in many years. Nifty Realty Index has been the top-performing sector for two consecutive years (2023 and 2024). It surged 148% during this period, outperforming the Nifty 50 Index which rose 31.5%.
Among the top performing realty stocks in 2024 were Oberoi Realty, Phoenix Mills, and Prestige Estates, as their share prices surged between 48% and 60%.
Housing sales grew 71%, 54%, and 31% in 2021, 2022, and 2023, respectively, as per data from Anarock. This demand came after five years of weakness and muted growth. Housing sales and new launches were slow in 2016-2019 due to demonetisation and the implementation of Real Estate (Regulation and Development) Act (RERA) and GST. In 2020, house sales declined 47% due to the Covid-19 lockdown, but this also created a favourable base effect for subsequent years.
Real Estate Inventory Trend. (Source: Anarock Residential Market Viewpoints Pan-India Q3 2024)
2021 was a year of recovery as the pandemic eased, the market environment stabilised and economic growth picked up. Housing demand outstripped supply, making up for five years of weakness. The real estate inventory started to decline, encouraging developers to launch new projects.
Consumer behaviour, which was skewed towards renting before the pandemic, shifted to ownership. The lockdown and the work from home trend created the demand for bigger houses. Coupled with rising disposable income, it shifted the demand to premium housing. Tapping this demand, developers launched several projects and saw a faster uptick in pre-sales. The three-year favourable demand-supply momentum drove realty stocks to new highs.
The momentum hit a speed breaker in 2024. The new launches slowed in the second quarter as elections led to approval delays. The third quarter ending September 2024 reported the steepest decline in new launches (19% YoY) since the pandemic, as per Anarock data.
As the demand-supply equilibrium got disturbed, house prices surged by an average of 21% in 2024. For the first time since the pandemic, annual house sales dipped by 4%. The stock market reacted quickly. The top-performing realty stocks of 2023 (DLF, Sobha Realty, Macrotech Developers, Brigade Enterprises, and Godrej Properties) witnessed a steep correction in June, September, and December 2024 as investors booked profits.
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Share price performance of 10 stocks listed on Nifty Realty Index. (Source: NSE)
This dip corrected the valuation of the Nifty Realty Index, reducing its price-to-earnings ratio (PE) from 71.1x in June 2024 to 47.9x now, below its five-year PE median of 52.6x.
What does the cooling in realty stocks mean to investors
The falling inventory, rising prices and decline in sales made some investors wonder if it was an early sign of a property bubble.
Houses have become unaffordable for middle-income buyers in areas like the Mumbai Metropolitan Region (MMR) and Delhi-NCR. However, these regions are also seeing growing demand for luxury housing from their large base of high net-worth (HNI) and ultra-high net-worth individuals (UNHIs) and a growing number of affluent millennials.
Increasing connectivity and job shifts are driving housing demand in other cities as well. Hyderabad is seeing a rapid surge in sales. The city’s house prices soared 32% YoY in the September 2024 quarter, as per Anarock data.
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Developers are tapping these trends and expanding into new micro-markets to diversify their revenue growth opportunities and gain market share. For instance, DLF is expanding into Mumbai, Oberoi Realty in Delhi-NCR, Prestige Estates into Mumbai and Hyderabad, and Brigade in Chennai and Hyderabad.
The significant surge in house prices in 2024 is likely to moderate to single-digit in 2025 and revive sales with new launches.
An uptick in new launches
JM Financial expects house prices to rise by 6% and volumes to increase by 12% in FY25, growing the overall realty market by 18%. The brokerage continues to remain bullish on some listed developers as consumers are buying from reputed players with a history of strong project execution. This shift has increased market share of Tier-1 listed developers by 8 percentage points since 2019, JM Financial noted, citing data from Propequity.
These developers are aggressively purchasing land and entering into joint ventures to cater to the growing demand. They are focused on branded and high-end products as consumers are demanding better amenities and larger spaces.
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The recovery in housing demand could once again point the realty stocks graph to the north. While the 2023 growth momentum would be difficult to replicate, analysts still expect a double-digit upside in a few realty stocks.
Could these realty stocks be buy the dip opportunities? We take a look
Godrej Properties
The Mumbai-based realtor has expanded to other cities. Its most successful project was Godrej Aristocrat in Gurugram in 2023, which attracted a booking value of Rs 2,667 crore. It expects to replicate the NCR success in other cities. The diversification could give it an opportunity to participate in the housing demand in other cities.
In the past three years, Godrej Properties has grown its sales and profits at a compounded annual growth rate (CAGR) of 58% and 70%, respectively. Axis Capital expects the developer to exceed its FY25 pre-sales guidance of Rs 27,000 crore as new project launches in the second half boost pre-sales. Considering the moderating housing demand, the brokerage expects Godrej Properties to achieve pre-sales of over Rs 10,000 crore in the next two years.
Godrej Properties PE ratio (January 2020- January 2025). (Source: Screener.in)
Godrej Properties was one of the key beneficiaries of house demand recovery. Its share price rallied 190% between March 2023 and July 2024. The last six-month correction of 26% has reduced its PE ratio to 48.3x, below its 5-year median PE ratio of 89.5x.
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The company has doubled its inventory from Rs 12,073 crore in FY23 to Rs 25,912 crore in September 2024. Strong demand momentum, upcoming launches, and the sale of inventory could bode well for the stock.
Axis Capital has reiterated a ‘Buy’ rating on Godrej Properties with a target price of Rs 3,800, representing a 57-58% upside from its current trading price of around Rs 2,480.
JM Financial and Jeffries are also bullish on DLF and Macrotech Developers.
DLF
DLF is largely concentrated in Delhi but is expanding in Mumbai. However, it diversifies its revenue by making commercial projects and earning rent on them. The company’s new luxury launches have made headlines of fastest selling apartments, generating the developer strong pre-sales. Its last three years sales and profit CAGR were at 6% and 33%, respectively, but sustained its inventory levels in the Rs 21,000-22,000 crore range. Moreover, it has a low debt-to-equity ratio of 0.11 and the company pays dividends. And its strong project pipeline could drive future revenue growth.
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DLF PE ratio (January 2020- January 2025). (Source: Screener.in)
JM Financial has a target of Rs 1,000 on DLF, a 35% upside from the current trading price of Rs 741. The recent correction in stock price has reduced its PE ratio to 51.5x, bringing it more in line with its 5-year median PE ratio of 56.8x.
Macrotech Developers
Like Godrej, Macrotech has strong three-year sales and profit CAGR of 24% and 69%, respectively, and a strong project pipeline. At the same time, it has exposure to commercial projects like industrial parks and warehouses, which it intends to use to generate rental income like DLF. Macrotech also has a low debt-to-equity ratio of 0.44. However, its inventory has increased 18% between FY23 and September 2024.
Macrotech Developers PE ratio (May 2021- December 2024). (Source: Screener.in)
JM Financial has a target of Rs 1,480 on DLF, a 25% upside from the current trading price of Rs 1,177. The stock is trading at a PE ratio of 54.6x, closer to its 3-year median PE ratio of 50.8x.
In conclusion
In the last four years, the demand shift towards luxury housing drove real estate stocks to new highs. This growth is likely to moderate in 2025 and 2026. However, the next growth cycle could come if affordable housing gains momentum. This would require policy-level changes such as increasing the cap on what constitutes affordable housing in cities like Mumbai where prices are high.
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In the meantime, commercial properties could continue to gain traction as business activities pick up. Commercial realtors Phoenix Mills and Oberoi Realty saw steady stock price growth in both 2023 and 2024 and could see the momentum continue in 2025.
Naredco-Knight Frank report estimates India’s real estate market to grow from $500 billion in 2022 to reach $5.8 trillion by 2047 as rising urbanisation and increasing disposable incomes drive demand for residential, commercial, logistics spaces, and data centers.
Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.
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Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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