Still some distance to cover—While demand showed signs of recovery (up 52% q-o-q in Q4CY20), it was still down 44% y-o-y compared to CY19 peak. CY20 was a roller coaster year for India’s property space—while demand collapsed in Q2CY20 due to the pandemic, the sector ended Q4CY20 on a high note with a sharp 72% q-o-q recovery in housing sales and 52% q-o-q improvement in office leasing. Industry consolidation continued, aided by funding constraints for tier 2/3 developers.
In our view, the buoyancy will sustain in the near term, leading to continued strength in realty stocks. Hence, we revise up sales assumptions and reduce NAV discount/WACC for coverage stocks. Our top picks are DLF and Brigade Enterprises (both ‘BUY’); we downgrade Godrej Properties to ‘HOLD’ due to rich valuations.
Housing space in CY20: A combination of rising affordability (due to decade low mortgage rates, stamp duty cut, price rationalisation by developers) and Covid-19-induced factors (demand for bigger units/luxury homes) led to absorption reviving sharply in Q4CY20 (up 72% q-o-q); MMR, in fact, clocked highest-ever property registrations in December 2020. Changing consumer preferences and funding constraints for tier 2/3 developers (loan sanctions down 35% y-o-y in 9mCY20) saw market share of listed developers surging to the highest since FY15.
Annuity space: Still some distance to cover—While demand showed signs of recovery (up 52% q-o-q in Q4CY20), it was still down 44% y-o-y compared to CY19 peak. We believe a full-fledged demand recovery will have to wait till CY22. Consumption in malls has been picking up and we believe the trend will gather traction.
Outlook: As argued earlier, consolidation is the driving feature of the property space and Covid-19 has only accelerated the process. We believe housing demand will remain robust in the near term. Office space absorption will recover fully only in CY22 with full-fledged return of employees to offices still some time away.
Funding crunch for tier 2/3 developers means that market share gains for organised developers will continue. This, along with benign interest rates, means realty stocks will continue to perform well.
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